CIBC ReportEQUITY RESEARCH
May 25, 2023 Earnings Update
TORONTO-DOMINION BANK
The Quarter Disappoints, But We Stick With Our Positive Thesis
Our Conclusion
TD reported a disappointing result with net interest income and operating
leverage falling short of our expectations. We thought TD could be a positive
outlier on these two key metrics. What now? Is it time to abandon the trade?
We are maintaining our Outperformer rating premised on: 1) highest CET1
ratio in the group; 2) conservative credit allowance ratio; 3) slower
normalization in PCLs vs. peers; and 4) valuation. We believe these
attributes can work in a challenging macroeconomic environment. Our price
target declines from $97 to $94 based on a reduction to our 2024E EPS.
Key Points
EPS revised lower. We are reducing our F2023 and F2024 EPS estimates
by 2%, mostly for lower NIM and higher non-interest expenses. This is similar
to estimate revisions we have made for other banks this week.
Not the positive outlier on NIM we were expecting. We thought that TD’s
low-cost deposit franchise could result in one more quarter of NIM expansion
while the other Canadian banks posted NIM contraction. Instead, NIM
declined Q/Q with the rest and net interest income fell short our forecast. TD
expects NIM to be pressured again next quarter due to rising funding costs,
but to start trending modestly higher in FQ4.
Expense growth hurts again. Non-interest expenses were 5% higher than
our forecast, despite revising our estimates higher last quarter. TD expects
expenses to be relatively flat through the remainder of the year
(sequentially). Management talked a good amount about organic growth
initiatives, which we like as a higher ROE source of growth, but this tends to
come with negative operating leverage up front. We are a little bit more
worried about the outlook for expenses for TD versus the group.
Credit performance is the silver lining this quarter. TD is the only one of
the banks to report a Q/Q decline in the total PCL ratio and no growth in
impaired PCLs. Also, management is guiding to the lower end of its F2023
PCL guidance range of 35bps-45bps. Given a strong ACL ratio of 77bps
(24% higher than pre-pandemic) and relatively positive consumer credit
trends, we think TD may be able to outperform peers in PCLs near term.
Loaded with capital but leaving us waiting on strategy. We look at the
primary advantage of excess capital today as protection against downside
risks. Share buybacks at a time when most others are issuing shares under
DRIPs is also a relative positive. However, questions around capital
deployment strategy are still just that ... questions ... with hope they will be
appropriately addressed at a future Investor Day.
The premium valuation has come out of the stock. TD is trading at a P/E
of 9.0x (NTM consensus), a 2% discount to the group relative to a historical
premium of 8%