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. It also has a 42% ownership stake in TD Ameritrade, a discount brokerage.

Key Highlights

• 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.

• Rising 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 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.

• Interest Rate Outlook: The federal funds rate is in the 0% to 0.25% range and ended its Quantitative Easing (QE) program in March. Toronto-Dominion Bank anticipates five 25 basis point hikes in the federal funds rate in 2022 and a terminal rate of 2.0% to be reached in 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. 

Financial Overview of Q1 2022

Source: Company Filing 

• The bank announced its Q1 2022 results, wherein it posted its 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.

• 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.

• 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.
  

Valuation Methodology (Illustrative): Price to Book Value based

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, 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 offered a dividend yield of 3.849%, which is significantly higher, considering the current interest rate environment. Therefore, based on the above rationales and valuation, we recommend a "Buy" rating on the stock at the at the last closing price of CAD 92.49 as on May 9, 2022.

One-Year Technical Price Chart (as on May 09, 2022). Source: REFINITIV, Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV

Technical Analysis Summary

Disclaimer

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