Toronto Dominion Bank Q2 2025 Earnings Results & Report

Toronto Dominion Bank EPS Results

• Actual EPS: $1.39
• Consensus EPS: $1.25
• Beat/Miss: Beat by +$0.14
• One Year Ago EPS: $2.04
• EPS Beat Rate: 8 of last 8 quarters

Toronto Dominion Bank Revenue Results

• Actual Revenue: $10.97 billion
• Expected Revenue: $13.36 billion
• Beat/Miss: Missed by -$2.39 billion
• YoY Revenue Growth: N/A

The Toronto-Dominion Bank, commonly known as TD Bank Group, is a Canadian financial services company serving personal, business, corporate and institutional clients. Its services include everyday banking, deposits, mortgages and other lending, credit cards, wealth management, insurance and capital markets services.

TD operates primarily in Canada and the United States through businesses that include TD Canada Trust, TD Bank and TD Securities. It also provides investment and wealth-management services through its TD Wealth businesses.

The bank traces its history to the Bank of Toronto, founded in 1855. The Bank of Toronto merged with The Dominion Bank in 1955 to form The Toronto-Dominion Bank. Its headquarters are in Toronto, Ontario.

Toronto Dominion Bank Q2 2025 Earnings Call Transcript

Key Takeaways

• Strong Q2 earnings of C$3.6 bn with EPS of C$1.97, driven by robust trading and fee income, volume growth, and a CET1 ratio of 14.9% as TD repurchased 30 mn shares under its NCIB.
• Exited US point-of-sale financing and sold US$9 bn of correspondent loans to boost US retail ROE and reallocate capital to its proprietary credit card business.
• Added over C$500 mn to loan reserves to address elevated policy and trade risks amid tariff volatility and a softer Canadian housing market.
• Launched a C$600–700 mn restructuring program, incurring C$163 mn in Q2 charges and targeting C$100 mn in pretax savings for FY25 and C$550–650 mn in annual run-rate savings.
• US AML remediation remains top priority, with expected pretax investments of about US$500 mn in both FY25 and FY26 to enhance transaction monitoring and compliance.

Presentation

[Operator]

Good morning, everyone. Welcome to the TD Bank Group Q2 2025 earnings conference call. I would now like to turn the meeting over to Ms. Brooke Hales, Head of Investor Relations. Please go ahead, Ms. Hales.

[Brooke Hales, Senior Vice President and Head of Investor Relations at TD Bank Group]

Thank you, Operator. Good morning and welcome to TD Bank Group's Second Quarter 2025 Results Presentation. We will begin today's presentation with remarks from Raymond Chun, the Bank's CEO, followed by Leo Salom, President and CEO of TD Bank, America's Most Convenient Bank, after which Kelvin Tran, the Bank's CFO, will present our second quarter operating results. Ajai Bambawale, Chief Risk Officer, will then offer comments on credit quality, after which we will invite questions from pre-qualified analysts and investors on the phone.

[Brooke Hales, Senior Vice President and Head of Investor Relations at TD Bank Group]

Also present today to answer your questions are Sona Mehta, Group Head, Canadian Personal Banking; Barbara Hooper, Group Head, Canadian Business Banking; Tim Wiggan, Group Head, Wholesale Banking and President and CEO of TD Securities; and Paul Clark, Senior Executive Vice President, Wealth Management. Please turn to slide two. Our comments during this call may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties.

[Brooke Hales, Senior Vice President and Head of Investor Relations at TD Bank Group]

Actual results could differ materially. I would also remind listeners that the Bank uses non-GAAP financial measures to arrive at adjusted results. The Bank believes that adjusted results provide readers with a better understanding of how management views the Bank's performance. Ray, Leo, and Kelvin will be referring to adjusted results in their remarks. Additional information about non-GAAP measures and material factors and assumptions is available on our Q2 2025 report to shareholders. With that, let me turn the presentation over to Ray.

[Raymond Chun, CEO and Group President at TD Bank Group]

Thank you, Brooke, and good morning, everyone. We had a strong quarter, and I'm looking forward to walking you through the details in a minute. Before we discuss that and share updates on our strategic review and AML remediation, I'd first like to comment on the current environment.

[Raymond Chun, CEO and Group President at TD Bank Group]

Despite a recent tariff de-escalation between the U.S. and China, that's temporary in nature, there continues to be a high degree of macroeconomic and policy uncertainty. This has made it difficult for businesses to make long-term decisions and created economic distortions, such as inventory stockpiling and purchases being pulled forward to avoid tariffs. This fluid environment has also driven volatility in capital markets and created angst for some households. In Canada, housing activity has slowed, and the job market has continued to soften, with notable losses in trade-exposed sectors.

[Raymond Chun, CEO and Group President at TD Bank Group]

With the election in Canada now behind us, there's a new opportunity for bilateral discussions with the U.S., and I've been encouraged to see the new federal government working alongside the provinces on opportunities to create economic growth, including those that eliminate interprovincial trade barriers. There are no quick fixes to the challenges our country is confronting. This is going to take time and considerable effort. As a major employer and participant in the economic growth in both Canada and the United States, TD has an important role to play. We stand ready to engage and work productively with governments in both countries.

[Raymond Chun, CEO and Group President at TD Bank Group]

Despite an uncertain external environment, our focus remains constant. We're staying close to our nearly 28 million clients, providing advice and supporting them through this period. Within TD, we will continue to prudently manage risk as we drive our businesses forward, ensuring we can be there for our clients as their needs evolve. With that, let's turn to the next slide. I'll start with an update on our strategic review.

[Raymond Chun, CEO and Group President at TD Bank Group]

This quarter, we completed the sale of approximately $9 billion in correspondent loans. We also communicated plans to wind down our U.S. point-of-sale financing business, which services third-party retailers. This business is comprised of a series of bespoke arrangements with each retailer, which impacts its profitability and scalability. Exiting this business is accretive to U.S. retail ROE and frees up capacity to invest in a proprietary bank card business.

[Raymond Chun, CEO and Group President at TD Bank Group]

In addition, through the strategic review, we are identifying opportunities to innovate to drive efficiencies and operational excellence. We are structurally reducing costs across the bank by taking a disciplined look at our operations and processes to find opportunities to automate and to re-engineer them. Kelvin will provide more details on our restructuring program in his remarks. These efforts will create capacity to accelerate digital and AI investments to upgrade capabilities and scale relationship banking. We are identifying growth opportunities and making good progress across each of our four pillars of our strategic review.

[Raymond Chun, CEO and Group President at TD Bank Group]

TD will host an investor day on September 29, where we will look forward to presenting a clear direction for the Bank's future and our refreshed medium-term financial targets. Please turn to slide four. In Q2, the Bank delivered a strong quarter with earnings of $3.6 billion and EPS of $1.97. We saw robust trading and fee income in our markets-driven businesses and volume growth year-over-year in Canadian personal and commercial banking. Impaired PCLs decreased quarter-over-quarter, reflecting strong credit performance broadly across asset classes. We added to our performing reserves for policy and trade uncertainty, taking a prudent approach with more than $500,000,000 in reserves added over the past two quarters. Ajai will share more details shortly in his remarks.

[Raymond Chun, CEO and Group President at TD Bank Group]

As of quarter end, the Bank's CET 1 ratio was 14.9%. We made good progress on our share buyback this quarter, repurchasing 30 million shares for a total of $2.5 billion. We still intend to deploy $8 billion of the proceeds from the Schwab share sale for our current NCIB. We have the capacity to execute the NCIB as planned while maintaining very strong capital levels in this uncertain environment. Please turn to slide five. This quarter, we saw strong execution across our businesses.

[Raymond Chun, CEO and Group President at TD Bank Group]

The Canadian personal and commercial banking segment delivered growth on both sides of the balance sheet. In RESL, we continue to enhance speed to decision and to provide tailored customer advice by referring more complex deals to our mobile mortgage specialists. As you know, our single greatest opportunity is to deepen relationships with our more than 15 million customers in Canada. We are executing against that with continued strong referrals to the business bank and wealth. In addition, the personal bank achieved record credit card penetration rates with new checking account customers.

[Raymond Chun, CEO and Group President at TD Bank Group]

In the business bank, loans are up 6% year-over-year, reflecting growth across our commercial business. In U.S. retail, we demonstrated resilience and momentum with six consecutive quarters of consumer deposit growth and core loans up 2% year-over-year. Our U.S. wealth business also has momentum. Total client assets were up 15% year-over-year, with mass affluent client assets up 26% year-over-year. We continue to prioritize and execute on our AML remediation and have made significant progress on our U.S. balance sheet restructuring. Leo will provide an update in his remarks.

[Raymond Chun, CEO and Group President at TD Bank Group]

Wealth management and insurance had a strong quarter, reflecting our diversified business mix. TD Asset Management added $5.3 billion in net institutional assets, and our advice business delivered strong net asset growth. We continue to innovate in TD Direct Investing, the only bank-owned brokerage in Canada to offer partial shares trading. We are seeing great momentum with an 83% increase in partial shares adoption by our Gen Z and millennial clients within the last six months.

[Raymond Chun, CEO and Group President at TD Bank Group]

TD Insurance continued its digital transformation, with over 46% of new sales this quarter completed digitally from end to end as we build on our position as the leading digital direct insurer in Canada. In wholesale banking, we continue to demonstrate the power of our broader platform with record revenue of $2.1 billion. This quarter, the trading business benefited from market volatility. We are navigating challenges in the market while executing against our strategy. Across the bank, we are delivering for our clients.

[Raymond Chun, CEO and Group President at TD Bank Group]

This quarter, both TD Auto Finance in Canada and U.S. retail in Florida were recognized by J.D. Power with the highest ranking in customer satisfaction. Please turn to slide six. We recognize that leadership in digital and mobile is critical. We are investing in these areas and enabling capabilities such as trusted data and AI. This quarter, we announced plans to open a new office in New York City for Layer 6, TD's AI Research and Development Center. TD has over 800 AI patent filings, and according to Evident AI, our portfolio is in the top 10 amongst banks globally. Last quarter, I mentioned that we have deployed a generative AI virtual assistant in our contact centers to drive efficiency while enhancing the customer experience.

[Raymond Chun, CEO and Group President at TD Bank Group]

We are now beginning to deploy this GenAI virtual assistant across our branch network, driving further colleague and customer experience and efficiency benefits. This year, we launched the next AI enhancement in our fraud operation and insurance claims to enhance our detection of suspected fraudulent auto and residential claims. This helps improve our response time to customers with genuine claims and continues our development of AI and insurance, which has been heavily engaged in machine learning for over a decade.

[Raymond Chun, CEO and Group President at TD Bank Group]

TD continues to innovate for our clients, colleagues, and communities. Please turn to slide seven. In March, we published our 2024 sustainability report, providing an update on our efforts to protect the bank while adapting business practices to meet changing market conditions and the evolving needs of our stakeholders. Before I turn it over to Leo, I want to thank our colleagues across the bank for their tremendous dedication and efforts. Together, we are writing the next chapter of this great institution's story. We will continue to invest in our talent and our culture. With that, over to you, Leo.

[Leo Salom, President and CEO at TD Bank]

Okay, thank you, Ray. Good morning, everyone. Please turn to slide eight. I am very pleased with the progress we've made on our U.S. AML remediation, which, as we've said before, is our top priority. We're executing against our remediation plan with focus and purpose. Operationally, we continued to make enhancements to our transaction monitoring coverage and investigative practices. As we said we would do last quarter, we implemented the final round of planned scenarios in our transaction monitoring system.

[Leo Salom, President and CEO at TD Bank]

Work is progressing on the use of specialized AI to detect, isolate, and automate our risk mitigation activities, and teams are continuing to work on the implementation of the machine learning tools with these capabilities expected to come online next month. In addition, we rolled out a streamlined workflow of our investigative practices, including the introduction of updated procedures for analyzing customer activity. These changes complement the updated procedures we introduced last quarter. It is important to note we're also making progress with data staging in relation to the lookbacks.

[Leo Salom, President and CEO at TD Bank]

Finally, we are continuing to implement risk reduction measures across our program. For example, this quarter, we introduced further enhancements to our cash deposit requirements at TD Stores. Collectively, these measures will help us manage the bank's financial crimes risk, and coupled with our improved monitoring, enable us to detect, escalate, and report potential activity of interest earlier and more effectively. While we still have more work to do, we remain on track with our planned remediation activities and are building the foundational AML program that we need for the years ahead. We'll continue to provide updates every quarter.

[Leo Salom, President and CEO at TD Bank]

Please turn to slide nine. I'd also like to provide an update on our balance sheet restructuring activities. You will recall this effort has two critical objectives. First, to strictly comply with and maintain a buffer to the asset limitation. Second, to ensure that we can continue to serve our clients and communities as their needs evolve. We made meaningful progress against our objectives this quarter. As of March 31, the first reporting date for the asset limitation, our two-quarter average assets were approximately $405 billion versus the OCC's asset limitation of $434 billion.

[Leo Salom, President and CEO at TD Bank]

At the end of the fiscal quarter, total assets were $399 billion, reflecting the closing of the correspondent mortgage sale. Since the end of the fiscal quarter, we have also paid down an additional $7 billion of bank borrowings. We expect to further reduce our assets in the upcoming quarters using the proceeds from the loan sales, investment maturities, and normalized cash levels to pay down additional short-term borrowings. As Ray mentioned, we communicated plans to gradually wind down the approximately $3 billion in our point-of-sale financing business, which services third-party retailers, as part of our efforts to reduce non-scalable and niche portfolios that do not fit our focus strategy.

[Leo Salom, President and CEO at TD Bank]

I remain confident that we will largely complete the loan sales we identified last October by the end of the fiscal year. With the execution of our loan reductions and pay down of short-term borrowing, we expect to comfortably meet the 10% asset reduction we guided to in October. Turning to the investment portfolio rotation, we continue to expect to complete the investment portfolio repositioning no later than the first half of calendar 2025. To date, we have sold approximately $23 billion notional for an upfront loss of just under $1.3 billion pre-tax.

[Leo Salom, President and CEO at TD Bank]

The investment portfolio repositioning is expected to generate an NII benefit in fiscal 2025 at the upper end of the $300-$500 million pre-tax estimated range we provided in October. Collectively, we expect these actions will enable us to improve return on equity through fiscal 2025 and into fiscal 2026. With that, I'll turn it over to Kelvin.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Thank you, Leo. Please turn to slide 10. TD delivered a strong quarter. Total bank PTPP was up 5% year-over-year after removing the impact of the U.S. strategic card portfolio, FX, and insurance service expenses. Revenue grew 9% year-over-year driven by higher trading-related and fee income in our markets-driven businesses, including fees from TD's sale of Schwab shares and volumes in Canadian personal and commercial banking. Expenses increased 12% year-over-year, with approximately one quarter of the growth driven by variable compensation commensurate with higher revenues, foreign exchange, and the impact of the U.S. strategic card portfolio.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Impaired PCLs declined quarter-over-quarter, reflecting strong credit performance. Performing PCLs increased quarter-over-quarter, reflecting policy and trade uncertainty. Please turn to slide 11. As Ray noted, we are undertaking a restructuring program to reduce structural costs and create capacity to invest to build the bank for the future. We incurred restructuring charges of $163 million pre-tax this quarter and expect to incur total restructuring charges of $600 million-$700 million pre-tax over the next several quarters.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

The restructuring program is expected to generate savings of approximately $100 million pre-tax in fiscal 2025 and annual run rate savings of $550 million-$650 million pre-tax. Cost savings will be driven by workforce and real estate optimization, asset write-offs, and business wind-downs and exits as part of the strategic review. We expect this will result in approximately 2% reduction to our workforce. Whenever possible, we will look to achieve this through attrition, and we will redeploy talent in areas where we are accelerating our capabilities.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Through this restructuring program and the strategic review more broadly, we are innovating to drive efficiency and structurally reduce the bank's cost base. We expect fiscal 2025 expense growth, assuming fiscal 2024 levels of variable compensation, FX, and U.S. strategic cards portfolio to be at the upper end of the previously communicated 5%-7% range, reflecting investments in governance and control and investment-supporting business growth, net of expected productivity and restructuring savings.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Please turn to slide 12. Canadian personal and commercial banking delivered continued volume growth on both sides of the balance sheet. Average loan volumes rose 4% year-over-year, with 3% growth in personal volumes and 6% growth in business volumes. This quarter, tariff uncertainty weighed on the Canadian housing market, and we saw slower purchase activity. In TDAF, we had record Q2 originations, which may reflect customers pulling forward auto purchases in anticipation of tariffs.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Average deposits rose 5% year-over-year, reflecting 4% growth in personal deposits and 8% growth in business deposits. Net interest margin was 2.82%, up one basis point quarter-over-quarter, primarily driven by higher loan margins. As we look forward to Q3, we again expect NIM to be relatively stable. Expenses increased, reflecting higher technology spend and other operating expenses. Please turn to slide 13. U.S. retail demonstrated resilience and business momentum while executing against our balance sheet restructuring.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Four loans grew 2% year-over-year. In key areas of focus, bank card, home equity, middle market, and small business, balances grew 11%, 9%, 8%, and 6% year-over-year, respectively. As you know, we are focused on enhancing ROE in U.S. retail. We are assessing relationship profitability across our loan portfolios. Net interest margin was 3.04%, up 18 basis points quarter-over-quarter, reflecting the impact of the U.S. balance sheet restructuring activities, normalization of elevated liquidity levels, which positively impacted NIM by 11 basis points, and higher deposit margins.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

As we look forward to Q3, we again expect NIM to deliver substantial expansion, reflecting the benefits from ongoing balance sheet restructuring activities and further normalization of elevated liquidity levels. Expenses increased $189 million US, or 13% year-over-year, reflecting higher governance and control investments, including costs of $110 million US for U.S. BSA/AML remediation this quarter and higher employee-related expenses. We continue to expect U.S. BSA/AML remediation and related governance and control investments of approximately $500 million US pre-tax in fiscal 2025. We expect similar investments in fiscal 2026. Please turn to slide 14.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Across these diversified businesses, the wealth management and insurance segment is firing on all cylinders. Wealth management revenue was up 13% year-over-year, with growth across fee-based revenue from higher markets level, transaction revenue from elevated trading activity in volatile markets, and net interest income from higher deposit volumes and margins. Insurance delivered gross written premium growth of 10% year-over-year. Expenses increased this quarter, reflecting higher variable compensation, technology spend supporting business growth initiatives, and employee-related expenses.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Segment ROE remains very strong at nearly 47%, and wealth management's peer-leading ROE is driven by robust returns across all of our businesses. Please turn to slide 15. Post-out banking had strong performance despite increased market volatility and the decline in capital markets activity. Expenses increased, reflecting higher technology and front office expenses, along with investments in our growth platforms. We continue to execute on our strategy to be a leading integrated North American investment bank with global reach.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Please turn to slide 16. Corporate net loss for the quarter was $161 million, a smaller loss than the same quarter last year, reflecting higher revenue from treasury and balance sheet activities, partially offset by higher net corporate expenses, which were primarily driven by higher governance and control costs. Please turn to slide 17. The Common Equity Tier 1 ratio ended the quarter at 14.9%, up 177 basis points sequentially. Strong internal capital generation was offset by the increase in RWA, excluding the impact of FX. The Schwab share sale increased CET 1 by 238 basis points.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

We repurchased 30 million common shares under our share buyback program this quarter, which reduced CET 1 by 40 basis points. Our average LCR for the quarter was 141%. The bank remains comfortable that it can operate at more typical LCR levels. However, while actions have been taken to manage liquidity buffers down, the proceeds from the Schwab share sale will continue to keep LCR elevated in the near term. With that, Ajai, over to you.

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

Thank you, Kelvin, and good morning, everyone. Please turn to slide 18. Gross impaired loan formations were 21 basis points, a decrease of four basis points of $400 million quarter-over-quarter. The decrease was recorded broadly across the Canadian and U.S. consumer and business and government lending portfolios. Please turn to slide 19. Gross impaired loans decreased $587 million quarter-over-quarter to $4.87 billion of 51 basis points. The decrease was reflected in the Canadian personal and commercial, U.S. retail, and wholesale segments, with the largest contribution from the business and government lending portfolios and a $197 million impact from foreign exchange.

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

Please turn to slide 20. 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 increased $129 million or 8 basis points quarter-over-quarter to 58 basis points. The increase is largely reflected in the Canadian personal and commercial banking and wholesale banking segments.

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

Please turn to slide 21. The bank's impaired PCL was $946 million, a decrease of $270 million quarter-over-quarter, reflected across the Canadian and U.S. consumer and commercial lending portfolios. By asset class, the largest quarter-over-quarter decreases were in the U.S. cards portfolios related to seasonal trends coupled with the impact of a prior quarter model update and the U.S. commercial lending portfolio. Performing PCL was $395 million compared to a recovery of $4 million in the prior quarter.

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

The current quarter performing provisions primarily relate to policy and trade uncertainty and were recorded in the Canadian personal and commercial, U.S. retail, wholesale banking, and corporate segments. Please turn to slide 22. The allowance for credit losses was CAD 9.6 billion, a decrease of CAD 9 million quarter-over-quarter due to a CAD 231 million impact from foreign exchange and lower impaired allowance, largely offset by performing reserves in the consumer and business and government lending portfolios related to policy and trade uncertainty and applied through overlays and an update to our macroeconomic forecasts.

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

Please turn to slide 23. In light of recent events, we have provided additional disclosure regarding industries most exposed to elevated policy and trade risk. These industries represent 9% of the bank's gross loans and acceptances, though the ultimate credit impact will depend on a range of factors, including the magnitude and duration of tariffs and government stimulus. While the industries of focus abroad, exposure to borrowers most sensitive to these risks is small, representing less than 1% of the bank's gross loans.

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

We will continue to work closely with our customers through these challenging conditions. Now, in summary, the bank exhibited strong credit performance this quarter, evidenced by lower gross impaired loan formations, gross impaired loans, and impaired PCLs. As a result of the ongoing policy and trade risks, we have reviewed our credit portfolios and bolstered our reserves in excess of $500 million over the past two quarters. That being said, there are many potential scenarios that could play out that may impact the economic trajectory and credit performance, some of which could drive fiscal 2025 PCL results beyond the 45-55 basis points range I previously provided.

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

However, TD is well positioned to manage through this period, considering our prudent provisioning, broad diversification across products and geographies, our strong capital position, and our through-the-cycle underwriting standards that have served us well through challenging conditions in the past. With that, operator, we are now ready to begin the Q&A session.

[Operator]

Thank you. We will now take questions from the telephone lines. If you have a question, please press *1. You may cancel your question at any time by pressing *2. Please press *1 at this time if you have a question. There will be a brief pause while the participants register for their question. Thank you for your patience. We will take the first question from Matthew Lee, Canaccord Genuity. Please go ahead.

[Matthew James Lee, Director of Equity Research at Canaccord Genuity]

Hi, good morning. Nice to hear my question. I wanted to ask Leo one here. When I think about the repositioning of the U.S. portfolio, you've talked a bit about $500 million in NII benefit in 2025, but the program could continue to the first half of 2026. Does that kind of imply that there's maybe a further couple hundred million of NII benefit that could be felt from the repositioning in '26?

[Leo Salom, President and CEO at TD Bank]

Matt, thanks for the question. As you know, the trade effectively takes a loss upfront, and then obviously you'll see the NII recapture associated with the higher rate structures on the investment bond portfolio over the next three years. You should expect that next year the number will be slightly higher than what we recorded this year to reflect the calendarization impact. That will continue through year three. Thereafter, depending on market conditions, those investment bonds would reprice at market rates at that point in time.

[Matthew James Lee, Director of Equity Research at Canaccord Genuity]

We should be thinking about NIM as expanding in 2026 beyond 2025 based on the repositioning?

[Leo Salom, President and CEO at TD Bank]

Yeah. Maybe if I could just take a moment on there because I know that our NIM is moving. We saw an 18 basis point improvement in the quarter. There is a number of factors that are influencing NII right now. First, as Kelvin described, we are running down some of the excess liquidity that we had built up late last year. Second, as you called out, the investment bond repositioning is starting to trickle through the P&L. Obviously, the tractor on-off rates right now represent a tailwind for the business.

[Leo Salom, President and CEO at TD Bank]

We do expect that the NII trajectory over the next few quarters to be quite positive. We do expect that NIM expansion for Q3 will be a substantial increase, mirroring what we saw in Q2. I should state because for the second quarter, we did have one extraordinary item, which is we did change the amortization period for some of our deferred product acquisition costs. That was about a CAD 46 million charge we took. We would not expect that to reoccur in Q3.

[Matthew James Lee, Director of Equity Research at Canaccord Genuity]

Okay. That's helpful. I'll pass the line.

[Leo Salom, President and CEO at TD Bank]

Thank you, Matt.

[Operator]

Thank you. The next question is from John Aiken from Jefferies. Please go ahead.

[John Aiken, Director of Research (Canada) and Senior Analyst at Canada]

Good morning, Ray. I wanted to clarify something that I thought I heard in your prepared commentary. In context of the exit of the correspondent loans to the point-of-sale in the U.S., you mentioned that the proceeds were going to be diverted into proprietary bank card operation. Did I get that correct? I guess, has that been previously disclosed, or is this a new initiative?

[Raymond Chun, CEO and Group President at TD Bank Group]

You're talking about the wind down of what we call our RCS business, which is our third-party credit card business. That is about a $3 billion portfolio that we are going to be winding down. That will provide us capital that we can then redeploy to our proprietary credit card business that we have been building out organically for the last number of years.

[John Aiken, Director of Research (Canada) and Senior Analyst at Canada]

Oh, fantastic. Thank you. Sorry about the misperception on my part. Calvin, in relation to the restructuring charge, again, I apologize if I missed this, but did you give us a breakdown in terms of which of the segments will be more or less impacted by this?

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

No, the highest, Kelvin. The impact is pretty broad-based across the bank. I can offer that in terms of nature. It's going to be on the workforce, real estate optimization, asset impairment, really about tech decommissioning, and then also wind down of some businesses like Ray and Leo talked about earlier.

[Matthew James Lee, Director of Equity Research at Canaccord Genuity]

Okay. Thanks. I'll requeue.

[Operator]

Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead.

[Gabriel Dechaine, Managing Director and Senior Equity Analyst at National Bank of Canada]

Hi. I just want to ask about your excess capital position. If I look at where you are today, I factor in the amount of buybacks you are still committed to at current prices, and then this restructuring charge, it leaves me with a pro forma ratio of about just under 14%. Still a good amount that I think most investors, and myself anyway, look at as, those are the funds that are still remaining from the Schwab sale that you said you would be using some of that for internal investment.

[Gabriel Dechaine, Managing Director and Senior Equity Analyst at National Bank of Canada]

If there is anything remaining, you could be increasing the buyback or buy back more stock than you have announced already at some point in time. Just wondering what the current view is and what the potential is for another large buyback as the macro climate is certainly diceier. Maybe there are other investment initiatives you have in mind? Maybe you can provide some clarity. Thanks.

[Raymond Chun, CEO and Group President at TD Bank Group]

Thank you, Gabe. I appreciate the question. Let me start by saying, as I said in my prepared comments, on the current NCIB, our commitment is still to execute the $8 billion NCIB buyback. As we get through our strategic review, and as I stated at the investor day, we will sort of lay out for you where we think we are going to deploy some of that capital. Some of that is certainly from where we are seeing significant organic growth opportunities. We are still looking at right-sizing some of the portfolios from a scale, those businesses that may not be core to our business.

[Raymond Chun, CEO and Group President at TD Bank Group]

We are looking at some of those opportunities. At the end of all of that, we will assess the current market. I mean, these are uncertain times, and there certainly is value in being well capitalized as we think forward. As we move through this uncertainty and as we get through our strategic review, if we still then feel that we have excess capital, as I've said before, then we then look at it as another opportunity to do another buyback.

[Gabriel Dechaine, Managing Director and Senior Equity Analyst at National Bank of Canada]

There could be some more costs associated with those funds. It should not be automatically assumed to be, "Hey, there's a big buyback coming in." There is more investment required, right?

[Raymond Chun, CEO and Group President at TD Bank Group]

Yeah. I think as part of our strategic review, we'll definitely be looking at how we deploy some of that capital. We will assess the opportunity for a buyback later in the year and sort of closer to next year.

[Gabriel Dechaine, Managing Director and Senior Equity Analyst at National Bank of Canada]

Okay. Thanks for that. On the bond portfolio repositioning, I think I've heard you talk about it in the past, like it was going to be done by the end of this quarter, or maybe I misunderstood, but we're roughly halfway through, should be done by the midpoint of the calendar year. That's fine. I'm just looking at the guidance on the NII uplift. You're still talking about a $300 million-$500 million U.S. NII uplift. That's not an annualized figure. That's an actual impact on this fiscal year, correct? I guess that's a more successful reinvestment. Is that basically the story?

[Leo Salom, President and CEO at TD Bank]

Yeah, Gabe. Gabe, good morning. This is Leo. Yes, the short answer, we are virtually complete, the actual investment bond portfolio. We had indicated we'd be done by the end of the calendar. I think we'll be done virtually over the next few days and weeks. I am pleased on where we are with regards to the work. Markets have been constructive, and we were able to complete it a little bit ahead of schedule. Now, with regards to the impact, what we have indicated, and Kelvin mentioned it in his prepared remarks, we had given back in October a range of $300 million-$500 million, and we can confirm to you right now that it'll be on the upper end of that range. That is in year 2025.

[Gabriel Dechaine, Managing Director and Senior Equity Analyst at National Bank of Canada]

Yeah. Okay. Okay. Great. Just to sneak another one in there, the corporate NII, big jump up there. You mentioned treasury activities. Is there any unusual drivers there, or is that some sort of new run rate?

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Hi, Kelvin. That's right. The treasury activity that we're mentioning relates to the investment from the proceeds of the Schwab share sale. We sold those shares. We had cash coming in, and those are invested, generating higher NII in the corporate segment. You would expect that NII to come down over time as we redeploy that cash to buy back shares.

[Gabriel Dechaine, Analyst at National Bank of Canada]

Got it. Thank you.

[Raymond Chun, CEO and Group President at TD Bank Group]

Thanks, Gabe.

[Operator]

Thank you. The next question is from Doug Young, Desjardins Capital Markets. Please go ahead.

[Doug Young, Analyst at Desjardins Capital Markets]

Hi, good morning. Just wanted to clarify one thing, Ray or Leo. Just on the business exit, the point-of-sale business exit, you're talking about the Target credit card books and the other retailer credit card books. Do I have that right, or do I have that wrong?

[Leo Salom, President and CEO at TD Bank]

No, Doug, let me just clarify that. There are three businesses in our overall cards table. One is our proprietary bank card business, which we've indicated is core, and we've done a number of things. Happy to elaborate a little bit more there. Second, our co-branded card offering, and we have two critical partners, Nordstrom, Target. Those remain strategic. We're very pleased with the relationship we have with both firms. Then there's this point-of-sale financing business, or what we have historically referred to as our retail card services business.

[Leo Salom, President and CEO at TD Bank]

The challenge with that business, despite the fact we have very strong relationships with some of the top retailers across the country, is that business does not scale quite as well. When we were looking at what was going to be required to transform that business, it was going to be consumptive of significant investment resources. At a time where we're really thinking through where do we want to invest capital for the greatest return, as Ray indicated, we felt that it was more important to be able to invest in our core proprietary cards business. Just to be clear, proprietary cards and our co-branded cards remain very much core and long-term strategic priorities for us.

[Doug Young, Analyst at Desjardins Capital Markets]

Okay. That's clear. Can you talk about any other businesses that you would be thinking from a wind down perspective? I would assume it's not just the U.S. This would be across all of your different areas. Anything else that you would highlight in terms of business exits or wind downs?

[Raymond Chun, CEO and Group President at TD Bank Group]

Look, I would say not on this call, but we certainly are looking at all of our options and going through all of our product services and businesses. Some of that we will share as we get to the Q3 call. We will have more to share as we get to investor day.

[Doug Young, Analyst at Desjardins Capital Markets]

No, fair enough. I figured I'd try. And then just maybe lastly, the Canadian banking, it seemed like there was a sequential decent drop in non-interest income. Maybe I've got that wrong. But is there anything in particular that went through in the Canadian banking on the revenue side that was abnormal, or what would have caused the sequential decline in the non-interest income line?

[Sona Mehta, Group Head at Canadian Personal Banking]

Hi, Doug. It's Sona. I'll take that. Sequentially, it would have been three less days sequentially. On a year-over-year basis, also, you might recall we had leap year last year. There was one fewer day effectively this Q2. That's about a 1% impact to revenue on a Q2 year-over-year basis or CAD 40 million. Overall, the business fundamentals for CAD/P&C are solid. Beyond the NII piece on the other income, there were a collection of smaller Q2 impacts. I can give you a couple of examples.

[Sona Mehta, Group Head at Canadian Personal Banking]

We would have seen moderated foreign currency spend, both on the debit and credit side, as consumers had a little more caution, especially with cross-border purchases. We saw some lower merchant acquiring revenue in the business bank and some small timing items. No one big thing on the other income side for Q2, but rather a collection of smaller things. I'd say a few factors. The biggest is days and leap year. I would say as we look ahead, we were encouraged by the late Q2 volume momentum. We read that as a positive sign for Q3. We're expecting quarter-over-quarter NIM stability, as Kelvin had noted. Overall, we're feeling confident heading into Q3.

[Raymond Chun, CEO and Group President at TD Bank Group]

Appreciate the color. Thank you.

[Operator]

Thank you. The next question is from Paul Holden from CIBC. Please go ahead.

[Paul Holden, Analyst and Director at CIBC Capital Markets]

Thank you. Good morning. I want to get a better understanding of what drove the sequential decline in impaired PCLs in Canadian P&C banking. Listening to Ray's opening remarks regarding the macro backdrop, all of which I think makes sense, would suggest sort of higher impaired PCLs, but obviously, we saw it lower. Just wondering what drove that and if there's anything we can take away from that trend in terms of forward expectations.

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

Yeah. Thanks, Paul. It's Ajai. Let me give you an overview of what's happening on impaired PCLs, and I'll go to Canadian P&C as well. As I said in my prepared remarks, impaired PCLs, they're down substantially, $270 million. We've seen it in Canadian P&C. The numbers in U.S. retail are quite big. Corporate segment as well. Numbers went up slightly for wholesale. If I look at Canadian P&C, the numbers are down across asset classes. So RESL numbers are down, auto numbers are down, cards numbers are down, and commercial numbers are down.

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

They're not large dollars, but I'd call them quite symbolic because it's really telling us that if you keep this tariff issue aside, we were really seeing peak PCL and good quality. I think the fact that rates have come down have helped borrowers. If I turn to U.S. Retail, again, the numbers down quite a bit. Cards is a big contributor. As I said in my prepared remarks, there are two factors there. One is seasonality, and the second is we put a model update in the last quarter. Quarter-over-quarter, there is a decline. There are other asset classes that have come down. For example, the commercial numbers in the U.S. are down a fair bit.

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

Auto is down, but part of auto is seasonality. Resin and other parts of other consumer are also down. This is not just a one-off. Yes, there is seasonality, and this model issue is certainly a factor and a contributor. I think on a broader basis, we are seeing good credit quality. Finally, on wholesale, wholesale numbers went up a little bit. It is $28 million. That is because we took some incremental PCL for three existing borrowers in telco, cable, media, power, and utility in CRE office. We did have two impairments there as well in forestry. That is the overall picture on impaired PCL. I do view it as quite a positive development.

[Paul Holden, Analyst and Director at CIBC Capital Markets]

Okay. Okay. Second question is with respect to the cost restructuring. And what I'm really going to try and get at is sort of roughly what proportion could we expect to benefit bottom line, i.e., operating efficiency. And one of the reasons I asked, just looking through some of the numbers in the subpack, I see in Canadian P&C, FTE year-over-year is down roughly 6%.

[Paul Holden, Analyst and Director at CIBC Capital Markets]

So we've had significant headcount reduction, but expenses still up 5%. So obviously, the composition of expenses is changing. So again, I think it just raises the importance of the question, how much of the cost restructuring gets redeployed into other initiatives, investments, and how much of it does drop through to improved efficiency?

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Hi, it's Kelvin. I'll take that. Yeah. We see significant opportunities to continue to invest in the business to drive future growth. One area, as you would expect, is on the digital AI and technology front. That spend does not always translate into specific FTEs, but those are investments that are important investments for us.

[Paul Holden, Analyst and Director at CIBC Capital Markets]

Okay. If I understand the answer then, then most of it gets redeployed into investments into the business.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Correct. That's correct.

[Paul Holden, Analyst at CIBC Capital Markets]

Okay. Okay. That's it for me. Thank you.

[Leo Salom, President and CEO at TD Bank]

Thanks, Paul.

[Operator]

Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.

[Sohrab Movahedi, Banks Analyst at BMO Capital Markets]

Okay. Thank you. Maybe if I can just start off with Leo. I mean, Leo, obviously lots of good work getting done, lots of moving parts. In the first half of the year in U.S. dollars, U.S. retail has done around $1.2 billion. What do you think the second half of the year will be from an earnings contribution perspective?

[Leo Salom, President and CEO at TD Bank]

Sorry. Good to talk to you. We're not going to provide guidance at this point, but maybe if I can give you the moving parts, sort of generally speaking, we're constructive. We're very positive about what the second half will look like. What's driving that is, one, as I indicated before, I do think we will have NII tailwinds based on the factors that I described before, that being less excess liquidity, the investment bond repositioning, and the tractor on-off rates. All those things will give us a tailwind as we think about the back end of the year.

[Leo Salom, President and CEO at TD Bank]

I do think that from a fee line, another income perspective, I mean, we saw in the quarter strong growth in our wealth business, continued work with TD Cowen and our commercial banking business on the lending fees line, and sustained growth in our retail consumer retail deposit franchise, which will translate into service fees. You put those things together, and I think from a revenue standpoint, we would expect revenues to be sustained and strong. From a cost standpoint, just quickly, I would say we would expect a moderation in the rate of growth in expenses in the second half. That reflects a number of things.

[Leo Salom, President and CEO at TD Bank]

One is the year-on-year financial shape, but also some of the work that we're doing from a productivity standpoint to absorb some of the governance and control type activity. I think we remain, while expenses related to AML will be slightly higher based on our spend pattern for the first half of the year, I think generally speaking, we'll see a moderation in the rate of growth. You heard Ajai talk about where we are from an overall health of the credit portfolio itself. You put those things together, and we are feeling optimistic about what the second half of the year is going to be.

[Leo Salom, President and CEO at TD Bank]

The one thing that we have been, and Ray's been very clear about this, I think I've messaged as well, is we're really focused on improving the return on equity profile quarter on quarter through this year and into next year. As we think about the investor day discussion, I think we'll provide a little bit more guidance as to firming up what that objective looks like. Long-winded way of saying, I think we feel very positive about the back end of the year.

[Sohrab Movahedi, Banks Analyst at BMO Capital Markets]

Okay. That's really helpful. Thank you. If I can just sneak one more in for Ajai. I mean, I think Ajai, you said tariffs aside, everything's fine actually. If you think about the complex environment, the tariffs, all the puts and takes, where do you think you will actually see deterioration? Will it be in the, I'll call it the business and corporate lending stuff, or do you think it will be in the consumer stuff?

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

Yeah. Thanks, Sohrab. I think you could see it actually in both because if the macro deteriorates, you will see it in consumer. The way we built our reserves, we have built both for consumer and business and government lending. I do think, and we have built the reserves that way, there could be a bigger impact on non-retail. Most of this $500 million that we're talking about has actually been built in business and government. What we did is we actually went and looked first at the industries that were exposed to tariffs.

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

That is the 9% number that we have disclosed. After that, we went and looked on a more narrow basis, saying, "What out of these borrowers are most sensitive to tariffs?" We looked broadly at the financial impact, again, across the 9%, not just the smaller population. We looked at the ratings migration that could occur. Based on that ratings migration, we built our reserves. Again, this $500 million, a big part of it is business and government, but there is some for consumer because if the macro deteriorates, I think you should expect there'll be impact on the consumer as well.

[Leo Salom, President and CEO at TD Bank]

Okay. Was this equity markets write-down, equity investment portfolio markdowns you talk about, would you dub that as tariff-related as well? This was in Wholesale Banking?

[Tim Wiggan, President and CEO at TD Securities]

Yeah. It's Tim Wiggan. I would attribute that to our strategic portfolio, mark to market on our strategic portfolio, which would correlate more to index declines within quarter. If you see a normalization quarter-over-quarter in the S&P, that can reverse. It was a factor in the quarter, but it was a mark to market event.

[Sohrab Movahedi, Banks Analyst at BMO Capital Markets]

I see. Okay. Thank you for that clarity. That's it for me.

[Operator]

Thank you. The next question is from Mike Rizvanovic from Scotiabank. Please go ahead.

[Mike Rizvanovic, Managing Director at Scotiabank]

Hi, good morning. Question for Leo. Just wanted to talk a little bit about the AML spend. It looks like I think this is new guidance. Correct me if I'm wrong, but the $500 million persisting in 2026. I guess I was under the impression, I think a lot of investors were, that that number could potentially fall off at some point. I'm not trying to ask for 2027 guidance, but is that still the dynamic where you do expect at some point these expenses will fall off to some extent, or is it more of a perpetual sort of run rate for AML?

[Leo Salom, President and CEO at TD Bank]

Mike, let me answer that by first saying that we are comfortable with the guidance that we have provided for 2025. In other words, we do believe that we will operate within the $500 million guidance that we have provided. We spent between the first and second quarter about $196 million. We will see a slight uptick as we go into the meat of our remediation delivery programs, but I feel comfortable with that guidance. What we did is we wanted to give the street a sense of what 2026 was going to look like.

[Leo Salom, President and CEO at TD Bank]

I would say right now we believe that the spend will be similar. The composition of the spend might change a little bit. It might be a little less remediation, more validation work, more look-backs, monitor costs, etc. The composition might change, but we think the overall spend level is going to be similar. I would not want to speculate on '27- '28, but I feel like the program is moving. We are actually making good progress on the remediation plan. We are hitting the milestones. We are tracking well. I feel positive about some of the expense guidance that we have already provided.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Okay. So no color. You can't really provide any color on potentially drawing that to some extent lower at some point in the future?

[Leo Salom, President and CEO at TD Bank]

There is no question as we start thinking about those outer years. I would expect that the raw remediation program management expenses that we are incurring today will fall off. We could have a slight uptick in some of our run costs, but net-net, there will be a decline at some point in the future.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Got it. Okay. That's helpful. Maybe a quick one for Sona, just on the mortgage business in Canada. It does look like TD saw a bit of a decline sequentially. I think there has been quite a bit of underperformance versus most of your peers just in terms of your RESL balances in the Canadian P&C segment. Can you help me understand what's driving that?

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

I was sort of under the impression that with the big push on the mortgage mobile specialist, sorry, that you probably could see at least market-level growth and maybe even some outperformance on some of those initiatives. I'm just a little bit confused as to why you would be underperforming just given some of those new distribution channels that you sort of introduced the last couple of years?

[Sona Mehta, Group Head at Canadian Personal Banking]

Yeah, Mike, this is Sona. Thanks for the question. Maybe I'll just start just briefly on the macro context. We've clearly seen buyers sitting, waiting a little bit on the sidelines. We're seeing inventory build up. I think we're up to five months of inventory. I think each of the last three months of Cree housing sales were in the range of 9%-10% lower on a year-over-year basis. It's certainly a different spot than where we were in early Q1. In early Q1, we were gearing up for a strong spring just given the natural supportive rate environment.

[Sona Mehta, Group Head at Canadian Personal Banking]

Uncertainty is weighing on buyers' sentiment. Really, a lot has changed in the last four months. Now, if I look at our specific competitive position, we're a multi-channel through-the-cycle lender. I would say in this particular market, our broker originations have moderated a little bit. We have really strong relationships, and we continue to compete for profitable business. You mentioned the MMS, and what I thought might be helpful to share is, despite the macro headwinds, I'm really pleased with the strength that we've seen in our proprietary channels.

[Sona Mehta, Group Head at Canadian Personal Banking]

If I look at our branch and MMS proprietary ecosystem, originations, and again, this is despite the macro environment, originations in those two channels are actually up double digits year-over-year. While you see a flat average sequential growth on a spot basis, we're actually up $1.5 billion quarter-over-quarter. The growth is there. The profile was a little different this quarter where we had higher paydowns in January and February, but we exited the quarter with momentum. Overall, I think the fundamentals are very good. What we are highly focused on, Mike, is really building speed in our ecosystem, ensuring we have specialization.

[Sona Mehta, Group Head at Canadian Personal Banking]

Our branch mortgage referral system ecosystem I had shared on the Q1 call, we had tripled referrals in that ecosystem in Q1, and that has continued in Q2. On a year-to-date basis, the branch MMS referral ecosystem is performing incredibly well. I would say good exit momentum to Q2, and I think we're poised as the market recovers to deliver on speed and expertise.

[Mike Rizvanovic, Managing Director at Scotiabank]

Yeah. That's great insight. Just one quick follow-up. Would you be expecting to trend in terms of loan volumes with the industry? I'm just not sure if there's a dynamic of protecting margins or maybe focusing on more profitable accounts that would maybe lead to a little bit of underperformance going forward.

[Sona Mehta, Group Head at Canadian Personal Banking]

I think, Mike, profitability should always be a factor, and so we will compete to win profitable business and then leverage our strength in channels where we can differentiate on speed and customer experience. Profitability is important.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Sona, do you want to elaborate a little bit on just the paydown dynamics that you've seen?

[Raymond Chun, CEO and Group President at TD Bank Group]

Yeah. Yeah. For sure, Kelvin. I can share that. So Mike, what we saw in Q1 was some seasonality late in the quarter. And really, that continued actually, interestingly enough, this year, this quarter into February. Both January and February were high paydown months for us. I think our book skews slightly more premium. As you have customers that have more disposable income by way of year-end bonuses, for example, and more liquidity in the market, we actually saw January and February prepayments were up double digits on a year-over-year basis. That was some of the dampness in late in Q1 and then also the jump-off point as well as early in Q2 in February. Those are perhaps a little bit more symptomatic of our premium book.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Okay. Got it. Thank you very much for the color. That's helpful.

[Operator]

Thank you. The next question is from Mike Huzanovic from Cormark Securities. Please go ahead.

[Lamar Persuad, Equity Research Analyst at Cormak Securities]

Yeah. Thanks. I want to go to the liquidity coverage ratio at 141%. You're saying that obviously it should be somewhat elevated in the near term, reflecting these proceeds from the Schwab shares. How should we—what's a more normal level given all the changes that's going on at TD? And should we be thinking about something in the 130% flat range and kind of how fast do you get there? Any thoughts would be helpful.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Hello it's Kelvin. I'll take that. Yeah. We would look at LCR in the normal range of 125-135. 130 is kind of smack in the middle. In terms of just adding, providing a little bit more color, last year when we raised liquidity, some of that liquidity were like a kind of a, let's say, one-year basis. It's going to take some time for those to run off. We're comfortable at normalizing on a liquidity level, getting back to the 125-135 over time.

[Lamar Persuad, Equity Research Analyst at Cormak Securities]

Is that something that we could expect in the next year? I'm just wondering if you could just provide some time frame around getting that?

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Yeah. Yes. The answer is yes because the two biggest pieces, as you know, is the proceeds from the Schwab sale, and then a lot of that is going to be redeployed in share buyback. That is going to be huge. Then some of those liquidity raise about a year or 18 months. Over that time frame, that would also decrease. That would normalize.

[Matthew James Lee, Director of Equity Research at Canaccord Genuity]

Okay. Thanks. A question on credit here. Appreciate the disclosure on these industry of focus from Terrace, but wondering if there's any color you can add as to what industries make up that kind of less than 1% cohort. Is it focused in any of these specific industries like automotive, agriculture, or anything that you've highlighted on your slide 23, or is it kind of well-diversified amongst these kind of industries of focus?

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

I'd say it's diversified across a number of industries that are on that page. Some of the ones I can call out for your benefit would be auto, agriculture, sundry manufacturing, transportation, and retail. That's where the most sensitive would be. The industries on the page are not confined to one industry, so it's fairly diversified.

[Matthew James Lee, Director of Equity Research at Canaccord Genuity]

Okay. How has your watch list kind of evolved over the last quarter?

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

Good question. Positively. The watch list has been coming down, and it's actually down across all business segments.

[Matthew James Lee, Director of Equity Research at Canaccord Genuity]

Okay. Thanks. Anything you could share in terms of magnitude of changes in that watch list?

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

I don't have all those numbers in front of me, but I think if I look at my impaireds, I wouldn't say they're huge movements, but they're positive movements.

[Lamar Persuad, Equity Research Analyst at Cormak Securities]

Okay. Thanks. That's it for me.

[Operator]

Thank you. The next question is from Darko Mihelic from RBC Capital Markets. Please go ahead.

[Darko Mihelic, Canadian Banking Research Analyst at RBC Capital Markets]

Hi. Thank you. Good morning. My questions are all for Ajai as well. Maybe just the first question is with respect to the reserve building. I do see the $500 million in the business built. One of the things that I do also see is when I look at the forward-looking indicators and sort of what has changed, I see very significant changes in Canada GDP, U.S. GDP, and the house price index is also fairly aggressive. You went from an expectation last quarter of 8% to a negative expectation for house prices for the rest of this year. A very small change overall in the actual stage one and stage two performing is about 3% quarter-over-quarter.

[Darko Mihelic, Canadian Banking Research Analyst at RBC Capital Markets]

I believe it's linked to very small changes in your unemployment expectations, where we're seeing like a 40 basis point increase in unemployment expectation, and it's essentially sitting where unemployment is today. Ajai, what is informing? First of all, am I correct in thinking that if we had a bigger change in the unemployment expectation, we would have seen even more reserve build and likely consumer retail? What is it that's informing this view that unemployment really won't change from the current level in Canada?

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

Yeah. Let me walk you through what the drivers of our tariff build are. First are the macro changes. Again, the macro changes are determined by our Chief Economist. They're not determined by me, but we have a strong governance process, and we take it through our governance process. What changed? Yes, you called out GDP. Actually, it came down quite a bit for Canada, quite a bit for the United States. Unemployment for Canada, quarter-over-quarter, at least for the near term, went up 0.4%. For the U.S., went up 0.2%. We did put tariffs into these scenarios, and I'm happy to share the numbers with you. For Canada, we put in tariffs of 10% for six months, and then those come down over a period of time.

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

For the U.S., we put in 23% for six months, and those come down over a period of time. The second thing I'd like to point out on macro is that our downside case is a recessionary case. That downside case also reflects the risks of higher tariffs. In addition to the macro, what we've done is we've looked more holistically at the book and said, at higher tariffs rate, what could be the impact on consumers and non-consumers? That's the way we built the overlay. It's really a combination of these macro plus the judgmental overlay that got us to the $500 million number.

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

At 101 bps, Darko, I do feel that we are well reserved. The one thing I want to caution you, because the situation is fluid, things could change. There's always the possibility we may have to build reserves. I feel good as to where we are. Our reserves reflect a forward-looking view as at April 30. If that forward-looking view evolves, we may have to build more reserves. Again, for this year, as you know, I'd really ask you to anchor on the fact that we're not changing our guidance. We're still saying for this year, 45-55 basis points, but we're also calling out that the risk to that range is elevated because of the environment.

[Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group]

Kelvin here. Also, additional color is that immigration policy is also constraining population growth. So it is harder to get a rising unemployment rate out of that factor. In addition, the assumption you can run various scenarios in your projection, but the scenario that we've run there is that we expect tariff resolution to be somewhere in Q3. And if that takes longer, that would worsen the economic outlook and potentially drive higher PCL.

[Matthew James Lee, Director of Equity Research at Canaccord Genuity]

Okay. Thank you for that. In one of your answers previously, Ajai, you mentioned that the industries that are at risk, you sort of suggested that of that 9%, just 1% is most sensitive, I suppose, to tariffs. You mentioned migration risk. Can you maybe better define that for me? I just want to understand the better definition and why the exposure is relatively small at less than 1% of rather sensitive to tariffs. Maybe you can just define that migration issue a bit better for me.

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

Let me outline how we built the reserves and created the overlay. We looked at the industries that were most exposed to tariffs. Okay? That is a broad set. That is the 9% number. Our reserves were built on that 9% number. What we did is we went actually within those industries, borrower by borrower, and assessed what is the financial impact on the borrowers. For example, we would look at revenue, we would look at cost of goods sold, and we would look at what impact that would have on the ratings of that individual borrower.

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

If you then aggregate that up, that created the overlay. Okay? That is the allowance bit. We then went to each borrower, and we used a set of criteria, and one of the main criteria we used was borrower strength, that which of these borrowers would be most vulnerable or most sensitive to tariffs. When we aggregated that number up, this is exposure, that number was less than 1% of gross loans.

[Darko Mihelic, Canadian Banking Research Analyst at RBC Capital Markets]

Okay. Thank you. Essentially, if your reserves are based on the 9%, but when you whittled it down to less than 1%, are you suggesting that the overlay actually brought the reserve down?

[Ajai Bambawale, Chief Risk Officer at TD Bank Group]

No. The reserves are based on 9%, but you could conclude a lot of those reserves are held against these names that are most sensitive.

[Matthew James Lee, Director of Equity Research at Canaccord Genuity]

Okay. That's better. Okay. Thank you.

[Operator]

Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Raymond Chun. Mr. Chun?

[Raymond Chun, CEO and Group President at TD Bank Group]

Yep. Give me one sec. Take a pause for a sec.

[Raymond Chun, CEO and Group President at TD Bank Group]

Listen, let me just thank everyone for joining the call. I will end with thanking our more than 100,000 colleagues across Canada, the U.S., and globally for all your support and all the hard work. We look forward to chatting with all of you next quarter. Thank you.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.

Participants

Analysts

• Brooke Hales, Senior Vice President and Head of Investor Relations at TD Bank Group
• Raymond Chun, CEO and Group President at TD Bank Group
• Leo Salom, President and CEO at TD Bank
• Kelvin Vi Luan Tran, Group Head and CFO at TD Bank Group
• Ajai Bambawale, Chief Risk Officer at TD Bank Group
• Matthew James Lee, Director of Equity Research at Canaccord Genuity
• John Aiken, Director of Research (Canada) and Senior Analyst at Canada
• Gabriel Dechaine, Managing Director and Senior Equity Analyst at National Bank of Canada
• Gabriel Dechaine, Analyst at National Bank of Canada
• Doug Young, Analyst at Desjardins Capital Markets
• Sona Mehta, Group Head at Canadian Personal Banking
• Paul Holden, Analyst and Director at CIBC Capital Markets
• Paul Holden, Analyst at CIBC Capital Markets
• Sohrab Movahedi, Banks Analyst at BMO Capital Markets
• Tim Wiggan, President and CEO at TD Securities
• Mike Rizvanovic, Managing Director at Scotiabank
• Lamar Persuad, Equity Research Analyst at Cormak Securities
• Darko Mihelic, Canadian Banking Research Analyst at RBC Capital Markets