The Toronto-Dominion Bank (TD) (TSE:TD), Canada’s second-largest financial institution with a sizable retail banking operation in the United States, has had a rough year. From a business perspective, the company recently settled an anti-money laundering (AML) violation with the U.S. Department of Justice (DOJ) and has posted poor results.
Amidst the weakness comes long-term opportunity, however, and this represents a rare occasion where a major financial institution can be purchased for a P/E ratio of under 10x. I believe it’s worthwhile for patient investors to consider TD at this juncture. As a result, I have a Buy rating on TD Shares.
TD has 4 major divisions, which are:
Canadian Banking
U.S. Retail Banking
Wealth Management
Wholesale Banking
TD’s entry into the United States was propelled by the 2005 acquisition of BankNorth, which was based in Vermont. It then solidified its U.S. presence by acquiring another east coast institution, Commerce Bank, in 2007. By the time I started visiting New York City for work in 2013, TD’s green logo could be found throughout Manhattan.
Interestingly, though, the U.S. retail banking segment hasn’t been the primary growth driver for TD in recent years and accounted for about one-third of overall adjusted net income in Q3 2024. Canadian banking operations continue to be the backbone of the company, and that’s a good thing, given TD’s recent troubles south of the border. Further, the Wealth Management and Wholesale Banking divisions tend to deliver less predictable results, and notably, the IPO market has been relatively poor lately.
It’s important to mention that TD also owns a ~10% interest in shares of Charles Schwab (SCHW), whose stock has rebounded some ~30% over the past few months.
It’s always challenging to buy a stock on bad news, but I’ve taken a bullish stance on TD stock following its recent regulatory problems in the United States. The company was charged by the DOJ with violating anti-money laundering rules by administering weak controls and surveillance of cash movement. It was alleged that at least three money laundering networks were able to transfer more than $650 billion of funds through TD accounts.
TD reached a US$3.1 billion settlement with the DOJ in October, a fine that could have been higher were TD uncooperative in the investigations. While shares fell about -6.4% on the day of the announcement, the size of the fine was not surprising, as TD had already taken provisions of more than $3 billion. What likely caught the market off guard was the asset limit imposed by regulators. TD must abide by an asset cap of US$434 billion within its U.S. retail banking division. That essentially eliminates any growth prospects for TD’s own banking operations in the United States.
However, the bank’s U.S. operations have long been posting mediocre results, and the optimistic way of looking at the situation is from the view that TD can refocus on operating efficiencies as opposed to growth. Meanwhile, of course, TD shares have retreated into value territory.
On Thursday (December 5), TD reported its fourth quarter and full-year results for 2024 (Canadian banks set their fiscal year from November 1 to October 31). Diluted earnings per share were C$1.97 for Q4 and C$4.72 for the full year, which represented an EPS decline of nearly 15%. However, investors shouldn’t forget about the ~US$3.1 billion settlement charge. On an adjusted basis, Q4 and 2024 EPS figures came in at C$1.72 and C$7.81, respectively, which is still slightly lower than it was in 2023.
The American operations accounted for much of the weakness due to higher credit loss provisions, higher non-interest expenses, and a dip in revenue. TD has been working to shore up its transaction monitoring processes, including related hiring and training. It’s no surprise that expenses are up. Still, TD’s Canadian banking operations continue to deliver, and Q4 2024 net income for this division rose 9% from the same period last year.
That matches what Royal Bank of Canada (RY) reported for Q4 earlier this week. Meanwhile, Bank of Montreal (BMO), which also reported earnings, revealed that their adjusted net income from Canadian banking operations fell 17% year-over-year. So, TD’s results continue to be decent where it counts the most. One worrisome takeaway from TD’s press release, however, is the announcement that management “is suspending the following medium-term financial targets: 7-10% adjusted EPS growth, 16%+ return on equity and positive operating leverage.”
Although analyst ratings are subject to updates following TD’s earnings release, Wall Street generally views TD stock as undervalued. I also share that view.
Of the nine Wall Street analysts that cover TD Bank, there are three Buy ratings, five Hold ratings, and one Sell rating. While that represents a consensus Hold rating, the average TD stock price target is $62.15, which suggests about 17.7% potential upside from the recent trading price.
Following today’s further share price decline, TD stock is trading at just 9.65x its adjusted EPS for the year that just passed. As the company continues its remediation of Anti-Money Laundering controls and invests in risk management, earnings growth will be challenged. I’m disappointed that TD management suspended previous guidance instead of choosing to update it, and that may raise some concern that the executive team has limited visibility.
With that said, CEO Bahrat Masrani is set to retire in the next few months, and it makes logical sense to allow the incoming new chief executive an opportunity to reset near-term financial goals.
At the end of the day, I have confidence that TD will get back on track. It may take some time, but at today’s stock price, the valuation is too good to pass up. Rarely does a major bank go on sale for below 10x earnings. At that multiple, I can stomach a temporary stall in growth and continue to hold a Buy rating on TD.
