Toronto-Dominion Bank (TSX:TD)(NYSE:TD) continues to deliver solid results in a difficult environment, but investors are wondering if the good times are coming to an end.

A review of 2015

TD has enjoyed a favourable macro-environment since the financial crisis, and 2015 has been another very profitable year.

Low interest rates have continued to fuel an unprecedented housing boom and Canadian consumers are still on a massive debt binge. This has led to huge profits for the bank. In fact, TD earned more than $8 billion in fiscal 2015.

The mind-blowing profit levels would lead you to believe that all is well, but the bank is concerned about the future and launched a major restructuring plan this year that has resulted in charges of nearly $700 million and the reduction almost 2% of staff.


Interest rates have bottomed out in the U.S., and that means fixed-mortgage rates are likely headed higher. Add this to further efforts by the Canadian government to cool down the housing market and the banks are probably looking at the last innings of the Canadian-mortgage windfall. TD is also preparing for a wave of changes in digital banking.

What to expect in 2016

The rout in the energy sector is hitting western Canada hard in 2015, but the slump could start to have a larger impact on the rest of the country in 2016.

As of October 31, TD had just $3.8 billion of drawn exposure to oil and gas companies. This represents less than 1% of the bank’s total loan book, so investors shouldn’t be concerned about that part of the oil crisis.

The main issue is the threat to the broader economy.

The price of WTI oil is now at the US$35 mark, which Canada Mortgage and Housing Corp. (CMHC) says could drive unemployment above 12% and set off a 26% plunge in housing prices. Oil would have to remain this low for five years for that to happen, according to CMHC, but investors might not wait to find out. If the market starts to get nervous, we could see a rotation out of the banks in the coming months.

TD knows the challenges that are on the horizon and is redirecting resources to meet the growing shift in consumer preferences from the branches to online and mobile banking. The company is also building strategic partnerships with FinTech companies to combat the rise of non-bank mobile-payment competitors. That process should pick up speed in the new year.

Investors could see TD dive deeper into the credit card space in 2016, where the bank has been aggressive in the past few years. The company might also look to boost the size of its U.S. operations as the strong U.S. dollar and a recovering economy south of the border offer an opportunity to offset weakness in Canada.

TD already has more branches in the U.S. than it does in Canada and CEO Bharat Masrani has said he will continue to expand the U.S. group if strategic opportunities arise that fit the company’s growth strategy.

Should you buy TD?

The bank is more conservative than its peers, and the strong U.S. presence is a solid hedge against difficult conditions in Canada. Management is making the changes needed to succeed in the coming years and the company is more than capable of riding out a downturn in the Canadian housing market.

There probably isn’t a rush to buy the stock right now as the sector could see some weakness in the coming months, but TD remains a strong long-term pick, and a pullback should be seen as an opportunity to add the shares to your portfolio.

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Fool contributor Andrew Walker has no position in any stocks mentioned.