TD Bank (TSX: TD) is up 26% in 2025. Investors who missed the rally are wondering if TD stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and capital gains.
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TD Bank share price
TD trades near $96.50 at the time of writing. The stock was as low as $74 in December, but remains way off the $108 it reached in early 2022 during the initial post-pandemic surge in the bank sector.
The pullback in 2022 and 2023 occurred as bank stocks broadly declined due to rising interest rates in Canada and the United States when the central banks battled to get inflation under control. Investors feared the aggressive rate increases would trigger a recession and unleash a wave of loan defaults. The recession didn’t materialize, likely due to all the excess cash held by businesses and households as a result of government financial support during the lockdowns, but borrowers with too much debt are feeling the pain.
As soon as the central banks indicated they were done raising rates and then started to cut rates in the second half of 2024, most bank stocks rallied on hopes of reduced loan losses.
TD, however, missed that party. The stock continued to decline in 2024 as a result of troubles in the American business. Regulators in the U.S. fined TD more than US$3 billion and placed an asset cap on TD’s American operations as penalties for not having adequate systems in place to identify and prevent money laundering.
The U.S. market has been a core growth focus for TD over the past two decades, so the asset cap has forced the firm to abandon its initial growth guidance as it works through a strategic review to identify new opportunities.
Upside
TD brought in a new CEO earlier this year. The bank has since sold off its remaining stake in Charles Schwab for proceeds of about $21 billion. TD is using $8 billion for share buybacks and is allocating the rest for growth projects and other initiatives. The bank is also streamlining its operations, recently announcing a workforce reduction of 2%, or about 2,000 positions.
The U.S. asset ban should eventually get lifted, which will enable TD to pursue growth again in the American market. In the meantime, the bank is sitting on a war chest of cash it can potentially use for acquisitions in other markets. The bank is also in a good position to compete for attractive mortgage customers who face fixed-rate loan renewals in 2025 and 2026. Winning the mortgage business provides a gateway to sell other products and services. Roughly two million fixed-rate mortgages are coming due in 2025 and 2026.
Risks
Defaults have increased, however, with banks taking higher provisions for credit losses (PCL). Tariffs risk pushing the U.S. and Canada into a recession. With interest rates still elevated, an economic downturn could drive up loan defaults as unemployment rises. Companies are also putting capital investments on hold until they have a better picture of how the trade dispute between the U.S. and Canada will get resolved. This will impact commercial borrowing at the banks in the near term.
Interest rates are expected to continue to decline, but there is a risk that tariffs could force inflation to rise again, which could potentially force the central banks to increase rates, or at least hold them at current levels for an extended timeframe. This scenario would be a headwind for bank stocks.
Time to buy TD?
Near-term volatility is expected, so I wouldn’t back up the truck right now. TD has had a big run and the broader market is due for a pullback.
That being said, investors with a buy-and-hold strategy might want to start nibbling on new weakness. Those who already own TD should be comfortable holding the position at this level. You get paid a decent 4.3% dividend yield and there is decent potential upside if a trade deal between Canada and the U.S. emerges in the coming weeks.
