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TD Reaps Benefit of Climbing Rates With More Gains to Come

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Toronto-Dominion Bank, which has struck two major deals to expand in the US this year, reaped the benefit of higher interest rates and sees more gains to come as central banks continue their fight against inflation.

Net interest income rose 17% to C$7.04 billion ($5.45 billion) in the fiscal third quarter, the Toronto-based company said in a statement Thursday. Analysts estimated C$6.62 billion, on average. Overall profit also beat projections.

Toronto-Dominion has large retail-banking operations in both its home market of Canada and in the US, where it’s seeking to bolster its franchise with the $13.4 billion takeover of First Horizon Corp. Those businesses make it Canada’s most rate-sensitive lender, which boosted results as central banks hiked rates last quarter. The trend may continue as the US Federal Reserve and Bank of Canada keep working to tame surging inflation.

“We have a strong consumer-deposit franchise, and if rates continue to rise, then we expect our margin to continue to rise as well,” Chief Financial Officer Kelvin Tran said in an interview. “There’s a lot of moving parts, but if the forward rates materialize, then we would expect to see our margin continue to expand.”

The bank’s net interest margin — the difference between what it earns on loans and what it pays for deposits — expanded to 1.74% from 1.64% in the previous three months as central banks raised interest rates. Loan balances expanded in most categories, with business loans and credit cards seeing particularly large gains.

Canadian Imperial Bank of Commerce, which also has a large retail-banking operation relative to its total size, saw similar trends last quarter. The lender’s overall profit topped analysts’ estimates as the net interest margin in its Canadian personal and business banking unit widened to 2.29% from 2.19% amid growth in credit-card and mortgage balances.

Shares of Toronto-Dominion have fallen 12% this year, and CIBC has slid 11%, compared with a 10% drop for the S&P/TSX Commercial Banks index.

Toronto-Dominion’s acquisition of First Horizon remains “on track,” Tran said. In addition to that deal, the Canadian bank is seeking to expand in American capital markets with a $1.3 billion deal to buy Cowen & Co.

Toronto-Dominion’s net income fell 9.3% to C$3.21 billion, or C$1.75 a share, in the third quarter. Excluding some items, profit was C$2.09 a share. Analysts estimated C$2.04, on average.

Canada’s banks stockpiled more capital to protect against potentially souring loans as economic forecasts deteriorated last quarter. Toronto-Dominion set aside C$351 million in provisions for credit losses. Analysts had projected C$401.2 million in provisions.

“This period saw a build that was quite small in the grand scheme of things,” Tran said. “I would say it’s credit normalization.”