Why is TD Bank Stock So Cheap?

Expect fairly messy earnings for the next year or more, although the upshot will be consistent mid-teens returns on equity.

Ruth Saldanha 7 July, 2023 | 1:06AM
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Toronto-Dominion Bank (TD) is one of the two largest banks in Canada by assets and one of the Big Six that collectively hold roughly 90% of our banking deposits – and as of now, it is the cheapest, trading at nearly a 17% discount to our fair value estimate.


Morningstar analyst Eric Compton points out that inflation and investments will catch up with the bank as expenses in 2023 grow as a result of, among other things, the Cowen acquisition and one-time charges. This leads to an efficiency ratio of roughly 56%, a bit above where the bank has been in the past. Overall, he expects fairly messy earnings for the next year or more, although the upshot will be consistent mid-teens returns on equity.

While this may seem like a problem, remember that TD has over $400 billion in Canadian assets under management and has a top-three dealer status in Canada, while also being the number-one card issuer in Canada. Toronto-Dominion should remain one of the dominant Canadian banks for years to come, and right now, the wide-moat stock is undervalued.

For Morningstar, I’m Ruth Saldanha


bulls Bulls Say

  • The profitability of its Canadian bank segment should continue for some time, providing a solid foundation for strong returns for Toronto-Dominion.
  • TD is one of the top issuers of cards in Canada, which tends to be a more profitable business if managed appropriately.
  • The bank's recent acquisition of Cowen should provide a unique boost for its U.S. capital markets operations and for revenue and net income growth over the next several years.

bears Bears Say

  • While Toronto-Dominion benefits more than most peers from higher interest rates, this is a double-edged sword, and the bank's net interest income could be more pressured if rates come back down.
  • The Canadian housing market is heating up again, potentially increasing risks for the economy and the banking sector. Credit losses could rise in the future, and earnings growth is likely to be pressured for one or more years going forward.
  • Toronto-Dominion will have to look outside Canada for additional growth opportunities, which could weigh on overall returns.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
The Toronto-Dominion Bank53.85 USD-0.72Rating
The Toronto-Dominion Bank73.88 CAD-0.87Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.


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