Rising Operational Costs And Digital Rivalry Will Undermine Bank Value

Key Takeaways

• Fintech disruption and regulatory expenses are pressuring traditional revenue streams and profit margins, challenging the bank's mid-term growth expectations.
  
• Exposure to Canadian real estate and trade uncertainties heightens risk of credit losses and weakens confidence in lending and asset expansion strategies.
  
• Strong revenue growth, digital innovation, strategic restructuring, and diversified operations position TD for sustained profitability and shareholder returns in evolving financial markets.

Catalysts

Provides various financial products and services in Canada, the United States, and internationally.

• Expectations for TD's future revenue growth may be overstated due to headwinds from the accelerating shift to digital and non-traditional financial services competitors, which are eroding the market share and fee income of traditional banks as fintechs and large tech platforms capture more of the financial services value chain.
  
• Persistent investment in compliance (notably elevated AML remediation, cyber, and fraud prevention costs) is expected to drive higher structural expenses, weighing on net margins and overall earnings growth well into 2026 and 2027, as regulatory scrutiny and associated operational costs remain elevated.
  
• The bank's outlook may be overly optimistic regarding lending growth and asset expansion in the US due to regulatory asset caps and balance sheet restructuring programs, which are anticipated to limit loan growth and put downward pressure on net interest income through most of 2026.
  
• TD's overexposure to Canadian real estate and consumer lending heightens its sensitivity to a potential housing market correction, which could result in elevated credit losses, thereby increasing provisions and constraining EPS and return on equity in a slower-growth macroeconomic environment.
  
• Prolonged uncertainty and potential volatility related to international trade (e.g., USMCA/CUSMA renegotiation and tariff risks) are likely to dampen business and consumer confidence, reducing demand for loans and wealth management products-threatening topline growth assumptions embedded in the valuation.

Toronto-Dominion Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Toronto-Dominion Bank's revenue will decrease by 0.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.0% today to 22.7% in 3 years time.
• Analysts expect earnings to reach CA$14.2 billion (and earnings per share of CA$8.73) by about September 2028, down from CA$20.3 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CA$16.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.6x on those 2028 earnings, up from 8.7x today. This future PE is lower than the current PE for the US Banks industry at 14.7x.
• Analysts expect the number of shares outstanding to decline by 2.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.22%, as per the Simply Wall St company report.

Toronto-Dominion Bank Future Earnings Per Share Growth

Risks

• Consistent volume and fee-based revenue growth in Canadian Personal and Commercial Banking, Wealth Management, and U.S. segments-and record asset levels in multiple divisions-indicate ongoing demand for TD's core services, which could support top-line revenue expansion even in challenging environments.
  
• Robust execution in AI/digital initiatives (e.g., TD AI Prism, Virtual AI Assistant) and continued investment in digital/mobile banking position TD to benefit from the secular shift toward digital financial services, potentially increasing operational efficiency and net margins.
  
• Strategic restructuring-including exiting low-return portfolios, targeted asset sales, and focused cost reduction programs-is generating significant cost savings and improving the bank's return on equity and profitability, providing cushion for long-term earnings growth.
  
• Strong capital position, with a CET1 ratio at 14.8%, and completion of major share buybacks, enhances TD's ability to increase dividends or repurchase additional shares, which could underpin shareholder returns and support the share price.
  
• Growing capital markets and advisory franchise (bolstered by the Cowen acquisition) and diversified earnings mix (including resilient insurance and wholesale banking) strategically position TD to capture growth opportunities and achieve stronger profit margins as global financial conditions stabilize.

Valuation

• The analysts have a consensus price target of CA$106.0 for Toronto-Dominion Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$120.0, and the most bearish reporting a price target of just CA$93.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$62.5 billion, earnings will come to CA$14.2 billion, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of CA$103.33, the analyst price target of CA$106.0 is 2.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.