TD Bank (TSX:TD) is up 14% in 2025. Investors who missed the bounce 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 long-term total returns.
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TD Bank stock
TD trades near $87 at the time of writing. The stock is close to its 12-month high after an extended rout that saw the share price slide from $108 in early 2022 to around $73 late last year.
The initial pullback in 2022 and 2023 was part of a broader decline in bank stocks caused by soaring interest rates in Canada and the United States as the central banks battled to get inflation under control. High interest rates are normally positive for banks as they enable the banks to generate higher net interest margins. The steep jump in rates over such a short period of time, however, put borrowers with too much variable debt in a tough spot, leading to a rise in provisions for credit losses.
As soon as the central banks signalled in late 2023 that they were done raising interest rates, bank stocks started to catch a new tailwind. TD, unfortunately, missed out on most of that party in 2024 due to problems within its American operations. Regulators in the United States hit TD with fines of more than US$3 billion and put a cap on TD’s American assets as penalties for not having adequate systems in place to identify and prevent money laundering. The U.S. has been a core driver of growth for TD over the past two decades as the bank made a series of acquisitions from Maine right down the east coast to Florida.
TD’s new chief executive officer is working to identify other opportunities for growth while the asset cap remains in place south of the border. The bank has already monetized some assets in the U.S. to free up capital that will be used for share buybacks and can be deployed on other projects.
Risk
Near-term risks are more connected to the broader Canadian banking sector. An extended trade war with the U.S. could plunge Canada into a recession and drive up unemployment at a time when the banks have more than two million fixed-rate mortgages coming due over the next two years that were taken out at rates that are quite a bit lower than rates currently available. Inflation is creeping up again, so the Bank of Canada might have less wiggle room to lower interest rates to ease the pain. As such, loan defaults could rise.
Opportunity
TD should eventually be allowed to pursue growth again in the United States. The bank has a strong capital position, and its Canadian retail banking operations remain very profitable. In the event the trade war turns out to be less disruptive than feared and the economy remains stable, the banks should be in good shape.
Time to buy TD?
Turbulence should be expected in the coming months. That being said, TD is probably still attractive right now for a buy-and-hold portfolio. Investors who buy TD stock at the current price can get a dividend yield of 4.8%, so you get paid well to ride out the volatility.
