It’s been a rough year for Toronto-Dominion Bank (TD) (TSE:TD), Canada’s second-largest financial institution with a large retail banking operation in the United States. From a business perspective, the company recently settled an anti-money laundering (AML) violation with the US Department of Justice (DOJ) and posted poor results.
However, in the midst of weakness comes long-term opportunities, and this represents a rare opportunity where a major financial institution can be bought for a P/E ratio of less than 10x. I believe it is worthwhile for patient investors to consider TD at this juncture. As a result, I have a Buy rating on TD shares.
TD has 4 main components, which are:
Canadian Banking
US retail banking
Wealth Management
Wholesale banking
TD’s entry into the United States was prompted by the 2005 acquisition of Bank North, which was based in Vermont. It then expanded its US presence in 2007 by acquiring another East Coast institution, Commerce Bank. strengthened presence. When I started commuting to New York City for work in 2013, TD’s green logo could be found all over Manhattan.
Interestingly, however, the US retail banking segment has not 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 remain the company’s backbone, and that’s a good thing, given TD’s recent troubles south of the border. Additionally, the Wealth Management and Wholesale Banking divisions deliver less predictable results, and in particular, the IPO market has been relatively poor recently.
It’s important to point out that TD also has a ~10% interest in shares of Charles Schwab ( SCHW ), whose stock has risen some ~30% over the past few months.
Buying stocks on bad news is always challenging, but I’ve taken a bullish stance on TD stock following its recent regulatory woes in the United States. The company was accused by the DOJ of violating anti-money laundering regulations by having weak controls and monitoring the movement of cash. It was alleged that at least three money laundering networks were able to transfer more than $650 billion in funds through TD accounts.
TD settled with the DOJ in October for US$3.1 billion, a fine that could have been higher had TD been uncooperative in the investigation. While shares fell about -6.4% on the day of the announcement, the size of the penalty was not surprising, as TD had already taken more than $3 billion in provisions. Asset limits imposed by regulators that would have likely closed the market. TD must adhere to an asset cap of US$434 billion within its US retail banking division. This essentially kills any growth prospects for TD’s own banking operations in the United States.
However, the bank’s US operations have been posting mediocre results for a long time, and the optimistic way to look at the situation is from the perspective that TD can refocus on operating efficiencies as opposed to growth. Meanwhile, of course, TD shares have retreated into price territory.
On Thursday (December 5), TD announced 2024 (Canadian banks have fixed their financial 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, representing an EPS decline of approximately 15%. However, investors should not 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 in 2023.
The US operations are highly vulnerable due to higher credit loss provisions, higher non-interest expense, and declining revenues. TD is working to advance its transaction monitoring processes, including related recruitment and training. It’s no wonder that costs are rising. Still, TD’s Canadian banking operations continue, and Q4 2024 net income for the division rose 9% from the same period last year.
This is consistent with what the Royal Bank of Canada (RY) reported earlier this week for Q4. Meanwhile, Bank of Montreal (BMO), which also reported earnings, revealed that its adjusted net income from Canadian banking operations fell 17% year-over-year. Hence, TD results continue to excel where it counts the most. One worrisome takeaway from TD’s press release, however, is the announcement that management is “suspending the following mid-term financial goals: 7-10% adjusted EPS growth, 16%+ return on equity and positive operating leverage .”
Although analyst ratings are subject to updates after TD’s earnings release, Wall Street generally views TD stock as undervalued. I also share this view.
Among nine Wall Street analysts covering TD Bank, three have a buy rating, five have a hold rating, and one has a sell rating. While this represents a consensus hold rating, The average TD stock price target is $62.15Which suggests a potential upside of around 17.7% from the recent trade value.
After further share price declines today, TD stock is now trading at 9.65x its adjusted EPS for the past year. As the company continues to strengthen its anti-money laundering controls and invest in risk management, earnings growth will be challenged. I am disappointed that TD management has suspended previous guidance rather than choosing to update it, and this may raise some concern that the executive team has limited visibility.
Plus, CEO Behrat Masrani is set to retire in the next few months, and it makes sense to give the incoming chief executive an opportunity to reset near-term financial goals.
At the end of the day, I am confident that TD will be 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 large bank go on sale for less than 10 times earnings. At that multiple, I might put a temporary stall in growth and maintain a buy rating on TD.
