TD Bank (TSX: TD) is on a roll in 2025 after a rough ride last year. Investors who missed the rebound over the past few months are wondering if TD stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and total returns.
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TD Bank share price
TD trades near $93 per share at the time of writing. The stock was as low as $73 late last year but still trades well off the $108 it reached in early 2022 during the post-pandemic rally in bank stocks.
The financial sector broadly declined in 2022 and 2023 as the Bank of Canada and the U.S. Federal Reserve aggressively increased interest rates to cool off an overheated economy in order to bring inflation back down to the 2% target. Higher interest rates are often positive for banks as they can enable the banks to generate better net interest margins. The steep increase in rates over such a short period of time, however, put businesses and households with too much variable-rate debt in a tough situation. This led to increased provisions for credit losses (PCL) at TD and its peers.
Most of the Canadian banks rallied through the end of 2024, supported by cuts to interest rates as the central banks switched from fighting inflation to orchestrating a soft landing for the economy. TD, however, missed the party due to issues in its American operations. Regulators in the U.S. hit TD with an asset cap and fined the bank more than US$3 billion for not having adequate systems in place to detect and prevent money laundering.
Opportunity
TD put a new CEO in place in February this year. The bank has since sold its remaining stake in Charles Schwab for close to $21 billion. TD is using $8 billion of the proceeds to buy back stock and will allocate the rest to drive near-term organic growth in Canada and fund other initiatives. The bank is working through a strategic review to determine its new growth focus over the medium term while the asset cap remains in place in the United States.
TD’s strong capital position, for example, should help it compete for the highest-quality customers among roughly two million fixed-rate mortgage holders in Canada that will see their cheap loans taken out in 2020 and 2021 come up for renewal this year and in 2026. Winning the mortgage can lead to the sale of other products, including wealth management, insurance, and credit cards.
TD just reported fiscal second-quarter (Q2) 2025 results that came in a bit weaker than the same period last year but better than many analysts had expected. Adjusted diluted earnings per share (EPS) dipped to $1.97 compared to $2.04 in fiscal Q2 3024.
TD continues to streamline operations. The company announced a plan to reduce staff by 2%, or about 2,000 positions.
Risks
TD continues to set aside large amounts of money to cover potential loan losses as interest rates still remain elevated compared to 2020 and 2021. PCL in fiscal Q2 2025 came in at $1.34 billion compared to $1.2 billion in Q1 2025 and $1.1 billion in fiscal Q2 2024.
A recession in the United States and Canada is possible in the coming year if tariffs remain in place and inflation spikes. This would likely lead to a jump in unemployment and potentially force the central bank to raise interest rates or at least keep them at current levels. In that scenario, PCL could surge, and the banks would be in for a rough ride.
Slowing population growth in Canada will also have an impact on Canadian banks. They have historically benefitted from the jump in mortgage and wealth management business that comes from affluent newcomers to the country.
Time to buy TD?
Near-term volatility is expected, but TD appears to be on the mend and should be a solid buy-and-hold pick at this level. Investors can pick up a 4.5% dividend yield right now and can use any further weakness to add to the position. The bank remains very profitable and has the capital needed to ride out economic turbulence.
