Post by
retiredcf on Apr 18, 2023 8:52am
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EQUITY RESEARCH
April 17, 2023 Rating Change - Upgrade
TORONTO-DOMINION BANK
Upgrading To Outperformer Following SCHW Update
Our Conclusion
With SCHW Q1 earnings out of the way, we think this is a good time to be
adding to TD. The stock has significantly underperformed its Canadian bank
peer group YTD (-6.5% vs. +4.4%). Revised offer terms for FHN and FQ2
results represent potential upside catalysts. We have updated our estimates
and price target (from $100 to $97) for Schwab impacts. Effective April 17,
we are upgrading our rating on TD from Neutral to Outperformer.
Key Points
Tail risk moves lower as Schwab update addresses downside risks.
Schwab reported Q1 results that were better than revised expectations and
addressed tail risk concerns. The business update showed that the company
continued to win new customers and advisors, even in the month of March.
Bank deposits were down 11% Q/Q, resulting in the use of higher cost
funding, which is a material headwind for NIM, but we think that was well
anticipated. Management addressed concerns over liquidity, regulatory
capital and duration risk. With the stock trading higher after the conference
call, we think management has adequately addressed tail risks.
Revised FHN offer could be the next catalyst. The current merger
agreement with FHN expires May 27. We expect TD and FHN will agree to
extend the offer and believe that an extension of six months or longer is
possible given regulatory uncertainty. As we previously wrote (link), there
are multiple reasons to justify a lower offer price, and we think something
around US$22.50 per FHN share is a reasonable expectation. Extending the
offer at the original price of US$25 would be disappointing for TD
shareholders. A longer closing period and a lower price would help address
capital concerns for TD. We estimate that TD builds ~30bps of CET1 every
quarter and that every 10% reduction in the offer price lifts pro forma CET1
by 30bps. Updated offer terms could come late April/early May.
U.S. bank results suggest FQ2 results should be fine. The large U.S.
banks that have reported results so far have surpassed consensus EPS
expectations, with modest declines in deposits and sequential NIM
expansion. We expect TD will look similar given the quality of its deposits.
We assume total bank NIM is up 4bps Q/Q, and there is a $50MM NII drag
from lower Schwab sweep deposits. The bank may not shoot the lights out
with FQ2 results, but it should also not be highly affected by the liquidity
events of March. TD reports FQ2 results May 25.
Revising estimates. We have updated our estimates for Schwab Q1
earnings and revised consensus going forward. We have also updated our
NIM assumptions and reduced NII for the Schwab deposit agreement. Our
revised FQ2 adjusted EPS of $2.00 compares to consensus of $2.10. For the
full year F2023, our adjusted EPS declines 0.4%.