What happened

Shares of the large Canadian lender Toronto-Dominion Bank (TD 0.75%) traded roughly 2.4% lower today in the final hour of trading as the bank gears up to report its earnings results for its second fiscal quarter of 2023 tomorrow morning. TD has also recently been sued over its failed acquisition of First Horizon (FHN -0.87%).

So what

Canadian banks are currently in their earnings season, and both Bank of Montreal and Bank of Nova Scotia reported earnings results today that came in weaker than expected. Bank of Montreal missed earnings today after reporting a rise in its provision for credit losses. It was a similar tale for Bank of Nova Scotia.

Analysts came into the quarter with concerns about the Canadian banking sector. Similar to the U.S., investors have become very worried about commercial loans in Canada. KBW analyst Mike Rizvanovic expects Canada's six largest banks to increase their provisions for credit losses by 28% collectively from the sequential quarter.

In other news, the Arbitrage Fund, a shareholder of First Horizon, has filed a federal lawsuit against TD, alleging the bank deceived investors about its anti-money laundering practices, which could have been a reason that regulators held up the deal for so long. "The lawsuit is without merit, and TD will vigorously defend it," TD said in a statement. 

TD and First Horizon recently terminated the planned acquisition after first announcing the deal in February 2022. TD had planned to buy First Horizon for $25 per share. First Horizon currently trades at around $11 per share.

Now what

While commercial real estate is expected to be an issue for all banks, I think it should be manageable at TD, with roughly 10% of the bank's loans in commercial real estate, split between Canada and the U.S. Credit will continue to normalize, but I see this as more of an earnings issue.

Furthermore, with the acquisition of First Horizon no longer happening, the bank now has a ton of excess capital, which should position TD well to deal with any unexpected credit surprises and return capital to shareholders.