TD Bank Group Investors Set to Cash In on North American Economic Growth

TD Bank Group (TSX: TD) has consistently generated net income for shareholders at a CAGR of 8.4%, with healthy growth in its loans and deposits

SmallCapPower | July 25, 2017: TD Bank Group (TSX: TD) (NYSE: TD) is the sixth-largest bank in North America by branches and serves 25 million customers in three key business segments (Canadian Retail, U.S. Retail, and Wholesale Banking), operating in a number of locations in financial centers throughout the globe. TD Bank Group ranks among the world’s leading online financial services firms, with 11.5 million active online and mobile customers. TD Bank Group had $1.3 trillion in assets on April 30, 2017. TD has reported consistent financial performance over the past several years and is expected to continue this track record going forward as North American economy shows signs of recovery.

Investment Thesis

  • TD Bank Group is well positioned for a continued top line growth going forward
  • Has consistently generated net income for shareholders at a CAGR of 8.4%
  • Healthy growth in Loans and Deposits
  • Attractive and a well diversified balance sheet
  • Future industry outlook remains positive for the banking sector

Strong Revenue Growth

TD Bank Group has been consistently generating strong growth in revenues over the past several years. During the second quarter of FY 2017, the bank’s revenues grew 3% to reach $8.4 billion. The four revenue segments Canadian Retail, U.S. retail, Wholesale and Corporate contributed to the positive revenue growth. Looking at the strong performance in the first and second quarter it’s safe to assume a strong performance during the fiscal year. Additionally, the strengthening of the U.S economy and rising U.S. interest rates should help the Bank maintain healthy revenue growth going forward. TD’s revenue are comprised of 60-65% Canadian Retail, 25-30% U.S. Retail, and 10-15% Wholesale Banking.

Consistent Profitability

TD Bank’s earnings have grown at a robust CAGR of 8.4% during 2012-2016. TD Bank Group has reported strong earnings from all major operating segments. During the second quarter FY 2017, the Bank’s total earning were up 22% YoY to reach $2.5 billion. The Canadian retail segment reported a 7% YoY increase in net income partially offset by non-interest expenses. The U.S. retail segment’s net income came in 21% higher, attributed to higher loan and deposit volumes, healthy deposit margins, and fee income growth. Wholesale segment’s net income rose 13% YoY and its Corporate segment reported a loss of $160 million. TD Bank Group has reported TTM net income of $9.7 billion. The Bank reported a 14.4% return for common equity shareholders.

Growth driven by increases in Loans and Deposits

TD Bank Group has the largest and fastest-growing share of retail deposits, driven by its customer focus and strong value-added services. Canadian retail segment’s loan portfolio grew by 4% YoY with the growth coming from personal loans (3%) and business loans (8%). Canadian deposits surged 11% during the quarter, where personal deposits contributed 8%, business 17%, wealth 20%. U.S. Retail segment also reported a positive loan growth of 6% YoY (personal 3%, business 9%) and deposits grew 9% YoY. The Bank has a well-diversified loan portfolio and funding mix. The total deposits have reached $807 billion and the loans clocked in at $618 billion during the second quarter.

Strong Capital Adequacy Ratios, Efficiency Ratio and Attractive Dividend Yield

TD Bank reported a Tier 1 ratio of 12.5% and Total Capital ratio of 14.9%. The Bank also has been paying attractive dividends to its shareholders, with a dividend yield of 3.3%. TD Bank Group also has a healthy efficiency ratio at 56.5%.

Valuation and outlook

TD Bank Group seems fairly valued on PE and Price-to-Book valuation multiples. At the current market price, the Company trades at 1.7x book and 12.9x TTM EPS, compared to the peer averages of 1.8x and 11.7x.

TD Bank has a healthy NIM of 1.96%, above the peer average of 1.78%. The return on assets based on the last filling is at 0.81%, marginally lower than the peer average of 0.85% and Return on Equity is 13.96% lagging the peer average of 15.32%.

Source- Bloomberg

The expected turnaround in the Canadian economy attributed to a surge in exports and oil production would be a growth driver for the Bank going forward. Consumer spending is seen gaining traction along with momentum in the housing market. Gains in the household sector are expected to be moderate in the coming quarters, with a marginal deterioration in the unemployment rates.

The U.S. market has low unemployment rates and broad-based income seems to be increasing, which would lead to higher household spending and housing demand. The corporate U.S. fundamentals have been improving as evidenced by a strong expansion of business investment in the January to March 2017 period. The U.S. Federal Reserve is likely to increase the interest rates, which will benefit the banking sector.

The Bank is targeting 7-10% adjusted EPS growth over the medium term. Management is aiming for mid-single digit EPS growth from Canadian Retail segment and expects a healthy EPS growth from the U.S. retail segment despite the U.S. Fed rate hikes.

Although the medium to long term outlook for the overall North American banking sector in general and TD Bank Group in particular looks positive, investors could wait for a small pullback to accumulate TD Bank shares, as it seems fairly valued at current levels.

Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.

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