Noah Zivitz

Managing Editor, BNN Bloomberg

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In a release Thursday, TD said its net income in the three months ending July 31 was $3.21 billion, marking a nine per cent drop from a year earlier when it earned $3.55 billion.

Stripping out one-time costs, including $22 million in charges relating to its planned acquisition of First Horizon Corp, TD's adjusted earnings per share worked out to $2.09, exceeding the average analyst estimate by five cents. The institution reaped the benefit of higher interest rates as its net interest margin — which measures the difference between how much a bank generates from interest on loans versus how much it pays in interest — expanded to 1.74 per cent from 1.64 in the prior quarter. 

Overall profit was weighed down by $351 million in provisions for credit losses, which was the most that TD had set aside for loans that could eventually go bad since the fourth quarter of 2020.

"In a complex macroeconomic environment, we are well-positioned to continue investing in our business and create long-term value for our shareholders,” said TD president and chief executive Bharat Masrani in the release.

The most significant driver of profit growth in the quarter was TD's U.S. retail business, where net income rose seven per cent year-over-year to US$1.12 billion. The boost from higher interest rates was evident in the unit’s net interest margin, which surged to 2.62 per cent from 2.21 per cent in the preceding quarter.

“Overall, we believe that the sheer magnitude of the bank’s U.S. margin uptick will win the day given the market’s intense focus on rate sensitivity, but despite the beat we expect a relatively modest market reaction,” stated Meny Grauman, an analyst at Scotiabank, in a report to clients. 

“The bar was set very high here and while TD did not leap over it, the bank did gingerly step over it,” he added.

TD is hoping to significantly expand its U.S. business with the US$13.4-billion purchase of Tennessee-based First Horizon. That deal was announced in February, and is awaiting final regulatory approvals. In its earnings release, TD said it's still hoping to close the transaction in the first quarter of its 2023 fiscal year.

In Canada, TD's retail banking business saw profit rise six per cent year-over-year to $2.25 billion. Bottom-line growth was held back in the quarter by an eight per cent jump in expenses, which TD pinned on investments in technology and its workforce. However, TD said it benefitted from higher interest rates and loan growth — including record credit card activity as average loans from that line of business hit $17.5 billion in the quarter.

Meanwhile, the bank's capital markets unit saw profit slide 18 per cent year-over-year to $271 million, which TD attributed to higher expenses and provisions. In contrast, revenue was essentially flat compared to the previous year at $1.08 billion as revenue from trading activity jumped 17 per cent.