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Key Takeaways for TD Bank Stock:
- Toronto-Dominion Bank stock (TD) trades at a small discount to our fair value estimate while investors assess the impact of interest rates and higher costs on the bank's businesses.
- With economic forecasts improving and its balance sheet well-provisioned, the bank should be positioned to handle higher credit costs.
- A historically stable Canadian banking system contributes to a Low Morningstar Uncertainty Rating, while TD Bank boasts a significant US presence with the most branches among Canadian banks.
Andrew Willis: It goes to show that popularity doesn't always pay in investing when Canada's most popular stock of 2023 takes a little tumble around a week after we covered it at the end of December.
A 6% slip in the price of TD stock preceded what equity analyst Michael Miller says are messy unadjusted earnings. Meanwhile, adjusted earnings increased from last quarter by 4%, he notes, but fell 12% from last year because of higher operating and credit costs.
Investors may also be feeling a little uneasy about the credit situation of Canadian households. Last quarter, TD's provisioning for loan losses rose to one billion Canadian dollars, up from 690 million last year. We expected this growth in provisions for impaired loans and believe it should increase further in the coming quarters. But these moves should be a source of strength, and as we mentioned last time while covering TD, the bank has one of the smaller exposures to Canadian real estate.
Costs—and Fees—Are Up at TD Bank
On the upside, we note that TD Bank posted strong fee income last quarter, up 19.4% year over year, which more than offsets the weakness in net interest income. So, investors currently considering selling this stock should look at the big picture first. TD Bank stock still has a Low Morningstar Uncertainty rating, thanks to a Canadian banking system that's been one of the more stable systems in the world.
Outside of Canada, we note that TD Bank has established a significant presence in the United States with the most branches among Canadian banks. We like this higher exposure to U.S. growth, although we do note that returns for TD in Canada are naturally better on average.
For Morningstar, I'm Andrew Willis.
TD 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.
TD Bears Say
- The bank's higher U.S. exposure and higher rate sensitivity is turning into a double-edged sword, as higher rates are now putting more pressure on earnings, particularly within the U.S.
- 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.
The author or authors do not own shares in any securities mentioned in this article.
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