Toronto-Dominion Bank’s margins are starting to shrink.

Toronto-Dominion -- the Canadian bank known for fat net interest margins, the difference between what a bank charges for loans and pays for deposits -- saw them narrow on both sides of the border in the fiscal third quarter, with a decline of 11 basis points from the previous three months at its U.S. retail division and a 3 basis point drop at its domestic personal and commercial bank.

“Interest rates in the U.S. have been declining, and so we see a little bit of a decline due to the interest rate environment,” Chief Financial Officer Riaz Ahmed said Thursday in a phone interview. There are “also some effects of our balance sheet mix as we continue to originate deposits and the reinvestment opportunities are at lower returns.”

While Canada’s second-largest lender typically benefits from the widest domestic net interest margins among its peers, the advantage may be dissipating. Margins in the Canadian personal-and-commercial division dropped to 2.84 per cent, while its U.S. margin shrunk to 3.27 per cent, the lowest since the second quarter of 2018.

Still, Toronto-Dominion Bank posted record profit in the quarter ended July 31, with new benchmarks in both its Canadian and U.S. retail operations, though earnings missed analysts’ expectations. Overall net income rose 4.6 per cent to $3.25 billion, or $1.74 a share, and adjusted earnings of $1.79 a share were less than the $1.80 average estimate of 13 analysts in a Bloomberg survey.

“Overall, the results came in slightly below expectations despite a strong trading quarter that reminds us of the volatility of this line for this bank,” CIBC Capital Markets analyst Robert Sedran said in a note. “The strain from the lower interest rate environment was evident as it was for other banks this quarter.”

Shares of Toronto-Dominion rose 0.4 per cent to $72.31 at 9:35 a.m. in Toronto. The stock has increased 6.5 per cent this year, outperforming the 4.9 per cent gain for the eight-company S&P/TSX Commercial Banks Index.

‘Better Performance’

If interest rates continue to decline, “it’s terrific for the economy and the consumers, so we could see much better performance on volumes as well as credit, but it would obviously have a downward bias on margins,” Ahmed said.

The latest earnings report showed that Toronto-Dominion is getting spending under control after three quarters in which expense growth outstripped revenue gains. That trend ended in the third quarter, with non-interest expenses rising 4.7 per cent from a year earlier, less than the 6.1 per cent increase in revenue, which reached a record $10.5 billion.

Also in the report:

• Toronto-Dominion may have more bank branches in the U.S. than Canada, but the lender’s domestic business generates more profit. Canadian banking posted a 2.2 per cent increase in earnings, to $1.42 billion. Profit at the U.S. retail division, which includes contributions from online brokerage TD Ameritrade, rose 13 per cent to $1.29 billion.
• The bank’s TD Securities unit had been a disappointment this year, with a net loss in the first quarter and a 17 per cent earnings decline in the second quarter, making it the worst-performing Toronto-Dominion division. The capital-markets unit rebounded in the third quarter, with earnings rising 9.4 per cent as trading revenue surged. Trading-related income jumped to $500 million, up 82 per cent from a year earlier, led by interest rate and credit trading.