Toronto-Dominion Bank (TSX: TD) is one of Canada's largest banks and operates into three business segments: Canadian retail banking, U.S. retail banking, and wholesale banking. The bank's U.S. operations span from Maine to Florida, with a strong presence in the Northeast. It also has a 42% ownership stake in TD Ameritrade, a discount brokerage.

Key Highlights

• Higher Dividend Distribution: The Company has an excellent track record of dividend distribution and has increased its distribution over the years, reflecting resilience and healthy cash flow generation. In Q1FY22, the bank distributed total dividend of CAD 2,947 million, which is significantly higher than CAD 1,387 million in Q1FY21. Moreover, at the last closing price of CAD 93.06 as on April 25, 2022, the stock offered a healthy dividend yield of 3.825%, which looks decent considering the current macros and interest rates.

Source: Company Filing

• Growth in Asset Under Administration (AUA):The company’s assets under administration (AUA) from the Canadian Retail segment stood at CAD 557 billion in Q1FY22, reflecting a growth of 15% on y-o-y basis. On the other hand, the U.S. Retail segment reported its AUA of USD 32 billion, which grew 23%, on y-o-y basis. A higher AUA reflects higher banking activity and hence would lead to higher income for the Bank.

• Focused on digital adoption:As per the recent trend of growing mobile and tech-savvy users, the company has increased its focus on higher digital adoption, which has shown remarkable growth in the recent quarters. Notably, at the end of Q1FY22, 61.6% of Canadian retailers and 52.3% of U.S. retailers are using digital banking for transactions, which is higher than 60.6% and 49.4%, respectively, in pcp. Active mobile users stood at 6.5 million and 4.3 million, respectively, in Canada and U.S., respectively, up from 6.1 million and 3.8 million, respectively, in pcp. Higher number of digital users denotes a higher scope for cross selling its financial products digitally.

Source: Company Filing

• Growth in Loans and Deposits:Despite the negative effects of the pandemic, the bank reported stable growth from its loan and deposits across the U.S. and Canada region. Both personal loans and personal deposits segments reported remarkable growth in Q1FY22 supported by strong consumer sentiment and higher purchasing activities. We expect the momentum to continue aided by lower COVID restrictions and revival in the economy.

Source: Company Presentation

• Acquisition of First Horizon Corporation: On February 28, 2022, the Bank and First Horizon Corporation announced a definitive agreement for the Bank to acquire First Horizon in an all-cash transaction valued at USD 13.4 billion. We believe this transaction would enhance the bank growth, driven by scale, distribution and geographic reach. The combination with First Horizon positions TD's U.S. franchise as the sixth-largest U.S. bank: USD 614 billion in assets, USD 469 billion in deposits, 10.7 million customers, 1,560 stores.

• Interest Rate Outlook: The federal funds rate lies in the range of 0% to 0.25% and ended its Quantitative Easing (QE) program in March. Toronto-Dominion Bank anticipates multiple rate hikes during 2022 and expects terminal rate to reach 2.0% by 2023. On the other hand, The Bank of Canada (BoC) raised the overnight rate to 0.50% in March and there the bank anticipate four more 25 basis points increases in the overnight rate in Canada and a terminal rate of 1.75% to be reached in 2023.

Source: Company Filing 

Risks associated with investment

The bank is principally susceptible to Interest rate volatility; any negative movement could have a significant negative impact on the group's health, including a loss in average asset under management, increased redemption demands, a decline in core earnings, and other factors. Moreover, the banking system reflects the current health of any economy, and uncertain economic outlook may lead to higher provisions for losses and would take a toll on profitability.

Financial Overview of Q1 2022

Source: Company Filing 

• Rise in total revenue: The bank announced its Q1 FY22 results, wherein it posted total revenue of CAD 11,281 million, which increased from CAD 10,812 million in Q1FY21. This was supported by higher income from both net interest income and non-interest income.

• Slightly higher non-interest expense: In the reported period, the bank’s non-interest expenses increased marginally to CAD 5,967 million in Q1FY22, as compared to CAD 5,784 million in pcp, due to higher salaries and employee benefits and an increase in Technology and equipment, including depreciation, partially offset by lower Occupancy, including depreciation expense.

• Higher income before income taxes stood higher at CAD 4,486 million v/s CAD 3,935 million in pcp, thanks to the elevated revenue as mentioned above.

• Increase in net income: The group reported its net income of CAD 3,733 million, grew from CAD 3,277 million in pcp, primarily due to the above-mentioned facts, partially offset by a higher income tax expense.
  

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 23.26% of the total shareholding. The Vanguard Group, Inc. and RBC Wealth Management, International hold the company's maximum interests at 3.37% and 2.90%, respectively. The company's institutional ownership stood at 57.37%. Higher institutional holding boosts the confidence in the mind of retail investors.

Valuation Methodology (Illustrative): Price to Book Value

Analysis by Kalkine Group

Stock recommendation

Toronto-Dominion Bank started the year strong, delivering revenue growth across all the business segments as customer activity gained additional momentum. With a focus on growth, the bank is continuously making investments in technology and new capabilities, positioning well to meet the customers' and clients' evolving needs. Additionally, its assets under administration (AUA) from the Canadian Retail segment witnessed a growth of 15% on y-o-y basis to CAD 557 billion in Q1FY22, is appreciable.

Furthermore, despite the challenging operating environment, the group continues to distribute elevated dividend, which is encouraging from an income investor’s point of view. At the last traded price, the stock was offering a dividend yield of 3.825%, which is significantly higher, considering the current interest rate environment in the country. Therefore, based on the above rationales and valuation, we recommend a "Buy" rating on the stock at the at the closing price of CAD 93.06 as on April 25, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 25, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary

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Disclaimer

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