Toronto-Dominion Bank

Toronto-Dominion Bank (TSX: TD) is one of the largest banks in North America and operates through three 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:

• Strong Balance Sheet: At the end of period, the group’s balance sheet remained strong with Tier 1 Capital ratio at 14.2%. The bank’s regulatory capital ratio improved 63 bps on q-o-q basis. Strong capital ratio would help the bank to absorb the shock, if any on account of sluggish scenario.
  

• Improvement in provisioning: During the quarter, the group recorded a recovery from credit losses amounting to CAD 0.377 million, as compared to a provision for credit losses of CAD 3,218 million in Q2FY20.
  

• Strong Growth profile: The company adopted innovative, customer-friendly strategies in order to remain afloat despite the sluggish economic scenario. The group reported an increase in digital users and a surge in the ‘self-service transactions’ in the recent quarters. Moreover, due to the available features within the mobile applications, the company also got ample scope for cross-selling strategies. Notably, digital adaptation has grown by 270 bps on y-o-y basis in Q2FY21, supported by growth from both the Canadian and US retails. Meanwhile, active mobile users were climbed by 8.9% (Canada Retail) and 11.4% (US Retail), respectively, in Q2FY21 to 6.2 million and 4 million users, respectively.               

Source: Company Presentation

Q2FY21 Financial Highlights:

• In Q2FY21 total revenue was recorded at CAD 10,228 million, down from CAD 10,528 million in the previous corresponding period (pcp). The decline was primarily due to a lower Net interest income (CAD 5,835 million v/s CAD 6,200 million in pcp) on account of lower margins in the Canadian and U.S. Retail segments.
• The company posted a recovery from credit losses amounting to CAD 0.377 million, as compared to a provision for credit losses of CAD 3,218 million in Q2FY20. However, an increase in higher non-interest expense (CAD 5,691 million v/s CAD 5,051 million in pcp) remained a drag.
• TD posted its net income on an adjusted basis at CAD 3,710 million, jumped from CAD 1,531 million in pcp. The surge was aided by a recovery of credit losses in the current quarter, as mentioned earlier.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks:  Due to the tepid economic scenario, the group might witness a surge in provisions, which would subsequently dampen the company’s financial health and would pose a threat to the group’s profitability.

Valuation Methodology (Illustrative): Price to Book Value

Stock Recommendation:

Despite the ongoing economic jolt, the group continued its dividend distribution, backed by stable cash flows. Notably, the total dividend distribution during the first half of FY21 stood at CAD 2,785 million improved from CAD 2,752 million, a year ago. Notably, the stock carries a dividend yield of ~3.8%, which looks attractive considering the persisting interests rate scenario. We have valued the stock using the Price to Book based relative valuation method and have arrived at a target upside of single digit (in percentage terms). For the said purposes, we have considered peers like National Bank of Canada, Royal Bank of Canada etc. Hence, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 82.34 on July 20, 2021.

One-Year Technical Price Chart (as on July 20, 2021). Source: REFINITIV, Analysis by Kalkine Group

Intact Financial Corporation

Intact Financial Corporation (TSX: IFC) is a property and casualty insurance company which provides written premiums in Canada.

Key Highlights:

• Elevated Operating ROE: Increasing operating ROE implies a higher profit generation without increasing the capital base, which is a key positive. During FY11 to FY20, the company reported a healthy average Operating ROE (OROE) of 14.4%, despite the economic cycles, which is a key positive.

Source: Company Presentation

• Conservative Investment approach: The company has its in-house investment management team to manage its funds, while the company focuses to invests the major chunk of its funds in the fixed-income segment with the highest credit ratings. Thus, chances of erosion of funds due to market volatility are very low, which indicates a balanced risk profile.

                Source: Company Presentation

• Declining combined ratio and Consistent growth in Direct premiums written: The company reported a regular decline in its combined ratio, which is a key positive. A combined ratio includes claims ratio and the expense ratio, and a slide in this indicates an improved performance. Additionally, over the years, the company reported consistent growth in its direct premium written, which further illustrates better customer engagement strategies through improved digital presence coupled with enhancing its distribution network.

Q1FY21 Financial Highlights:

• In first quarter Q1FY21, the company posted total revenue of CAD 3.050 billion, stood slightly higher than CAD 3.029 billion in the previous corresponding period (pcp). The improvement was driven by slightly higher net earned premiums (CAD 2.777 billion v/s CAD 2.766 billion in Q1FY20).
• Income before income taxes came at CAD 630 million, jumped from CAD 146 million in Q1FY20, supported by a slide in net claims incurred (CAD 1,431 million v/s CAD 1,829 million in pcp), while a higher underwriting expense (CAD 956 million v/s CAD 890 million in Q1FY20) remained a drag.
• Net income attributable to shareholders was recorded at CAD 514 million, jumped from CAD 107 million in Q1FY20.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Any increase in the total claims incurred and underwriting expenses would dampen the company’s performance and would take a toll on the overall margins of the group.

Valuation Methodology (Illustrative): Price to Book Value 

Stock Recommendation:

The company has a leadership position in Canada, while it is enhancing its footprints across the UK and Ireland through optimizing its underwriting performance, improving customer experience, and implementing innovative digital engagement. Despite the sluggish economic scenario, the company reported a 5% y-o-y growth in its direct premiums written (DPW) within the commercial lines segment in Q1FY21, driven by strong business performance in both regular and specialty lines. With the gradual recovery of the economy, we expect the momentum to accelerate in the coming quarters. We have valued the stock using the Price to book value based relative valuation method and have arrived at a target upside of single-digit (in percentage terms). For the said purposes, we have considered peers like iA Financial Corporation Inc, ECN Capital Corp etc. Hence, considering the above facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 170.08 on July 20, 2021.

One-Year Technical Price Chart (as on July 20, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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