Toronto-Dominion Bank (TSX:TD) is one of Canada's largest banks and operates 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.

Key Highlights:

• Growth in operating metrics: Assets under administration (AUA) from the Canadian Retail segment stood at CAD 537 billion in Q2FY22, as compared to CAD 514 billion. On the other hand, the company’s Assets under Management (AUM) stood at CAD 411 billion in Q2FY22, higher than CAD 397 billion in pcp. The growth was driven by growth driven by a surge in net assets during the quarter. We believe, this performance is impressive considering the ongoing tepid economic scenario.

• Reaping yields from 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 Q2FY22, 63.2% of Canadian retailers and 53% of U.S. retailers are using digital banking for transactions, which is higher than 62.3% and 50.2%, respectively, in pcp. Active mobile users stood at 6.7 million and 4.4 million, respectively, in Canada and U.S., respectively, up from 6.5 million and 4.3 million, respectively, in pcp. Higher number of digital users denotes a higher scope for cross selling its financial products digitally.

Source: Company Presentation

• 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 Q2FY22 supported by strong consumer sentiment and higher purchasing activities. We expect the momentum to continue aided by a gradual revival in the economy. Total loans and total deposits stood at CAD 773 million and CAD 967 million, respectively, up 5% and 6%, respectively, on y-o-y basis.

Risk Associated with the Investment:

The bank’s operations might be hindered by change in interest rates, which might lead to lower consumer sentiment and a decline in purchasing activities. This might hamper the company’s lending segment.

  Q2FY22 Financial Highlights:

Q2FY22 Income Statement Highlights (Source: Company Report)

• TD announced its second quarter results FY22, wherein the company posted its total revenue of CAD 11,263 million, increased from CAD 10,228 million in Q2FY21. This was supported by higher income from both net interest income and non-interest income.
• Non-interest expense stood higher at CAD 6,033 million in Q2FY22, as compared to CAD 5,729 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. Income before income taxes stood higher at CAD 4,611 million v/s CAD 4,435 million in pcp, thanks to the elevated revenue as mentioned above.
• The group reported its net income of CAD 3,811 million, grew from CAD 3,695 million in pcp, primarily due to the above-mentioned facts, partially offset by a higher income tax expense.

Valuation Methodology (Illustrative): Price to Book value based

Analysis by Kalkine Group 

Stock Recommendation:

TD has reported its Common Equity Tier (CET) 1 Ratio of 14.7% in Q2FY22, improved from 14.2% in Q2FY21. A higher CET 1 ratio suggest higher financial strength and indicates that how well the bank can withstand economic depression and other economic crisis. The stock of TD also carries a dividend yield of ~3.738% on an annualized basis, which looks impressive considering the persisting interest rate scenario. We have valued the stock using the P/BV-based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered industry peers like Royal Bank of Canada, National Bank of Canada etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of TD at the last closing price CAD 95.23 on May 26, 2022.

One-Year Technical Price Chart (as on May 26, 2022). Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITIV

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