In a separate note, RBC's Mr. Mihelic said the second quarter from Toronto-Dominion Bank was “okay and the stock is undervalued” following “all of this turbulence.”
“TD’s adjusted EPS was close to our expectation as lower than expected PCLs [provisions for credit losses] offset weaker than anticipated PPPT [pre-provision, pre-tax earnings],” he said. ”Results in capital markets were particularly light despite the addition of Cowen, but this should improve from here. NIM expansion is seemingly coming to an end and without FHN, TD is looking at more de-novo branch growth in the U.S. and a 30 million share buyback to be completed quickly (another NCIB is likely, though not assumed). We continue to see upside to earnings as TD deploys excess capital and we see the shares as undervalued.”
For the quarter, TD reported adjusted earnings per share of $1.94, a penny below Mr. Mihelic’s estimate and 12 cents below the consensus projection on the Street due largely to PCL weakness.
“TD no longer expects to meet its medium-term adjusted EPS growth target of 7-10 per cent, following the termination of the First Horizon (FHN) deal,” the analyst said. “TD will hold an investor day on June 8th focused on the Canadian retail business, and a subsequent investor day focused on its U.S. and wholesale businesses.
“We update our model to reflect Q2/23 actual results, lower Canada P&C and capital markets assumptions, and higher wealth earnings. In Canada P&C, we assume lower NIMs and non-interest income throughout our forecast period and reflect slower loan growth and higher impaired PCLs in 2024. We lower our non-interest revenue assumptions and reflect lower costs in capital markets throughout our forecasting period. We also assume that TD will repurchase 30 million shares in Q3/23, and this has a positive impact on our core EPS estimate. Overall, our core EPS estimate moves to $8.41 (was $8.40) in 2023 and $9.10 (was $8.84) in 2024.”
Maintaining an “outperform” recommendation for TD shares, Mr. Mihelic raised his target by $1 to $96. The average is $93.31.
Others making changes include:
* National Bank’s Gabriel Dechaine to $90 from $94 with a “sector perform” rating.
“All-bank NIM compressed on a sequential basis, reflecting NIM declines in both the Canadian (down 6 basis points quarter-over-quarter) and U.S. (down 4 bps) P&C operations,” said Mr. Dechaine. “Otherwise, performance in both businesses was strong, with Canada delivering double-digit PTPP growth, the U.S. double-digit earnings growth, and both positive operating leverage. As it relates to NIM performance, management expects a return to moderate expansion by the end of the year.”
* Desjardins Securities’ Doug Young to $98 from $104 with a “buy” rating.
“Adjusted pre-tax, pre-provision (PTPP) earnings were 3 per cent below our forecast and increased 10 per cent year-over-year,” said Mr. Young. “There was nothing new on what prevented the First Horizon acquisition. While net interest margins (NIMs) fell short of our forecast, management sees a path to moderate expansion starting in 4Q FY23 for its Canadian and US P&C banking operations.”
* Credit Suisse’s Joo Ho Kim to $85 from $88 with a “neutral” rating.
“·After serially beating (our) PTPP forecasts over the past 3 quarters, TD reported a rare miss on our estimates in Q2,” said Mr. Kim. “The biggest driver of the miss was on NIMs, as both P&C (and all-bank) reported sequential declines (along with the bank’s guidance for some moderation in Q3 before improving in Q4). Wholesale Banking results also surprised to the downside, as earnings stepped down meaningfully, and we believe some pressure could remain for the remainder of the year as the bank further integrates its Cowen acquisition. Last but not least, while TD expects to complete its near 2-per-cent buyback by the end of this summer (and perhaps launch another one thereafter), we believe the timing of further deploying its excess capital is still uncertain. Yes, the bank will deploy some of that through building out its branch presence in certain MSAs (150 branches by 2027) and while we agree that having a cushion on capital in uncertain times makes sense, we also believe continued clarity on how the bank plans to expand can ultimately be a win for the shares’ revaluation (especially at times when growth remains scarce).”
* Canaccord Genuity’s Scott Chan to $86 from $89 with a “buy” rating.
“Overall, TD’s FQ2 results were lighter with NII and expenses coming in below expectations (but credit better) leading to an adj. EPS miss. As a result, we made net negative changes to our forecasts,” said Mr. Chan.
* Scotia’s Meny Grauman to $103 from $104 with a “sector outperform” rating.
“While we certainly would not argue that TD delivered a good result in Q2, we do believe that the sell off on earnings day was overdone,” said Mr. Grauman. “First off, while the margin expansion story at TD is largely over, that was already abundantly clear in Q1 and should not come as a surprise. Secondly and more importantly, although TD’s buyback program may have underwhelmed the market it remains the Canadian bank with the most excess capital, and that is unlikely to change anytime soon. True, TD has yet to answer some key strategic questions in light of the FHN deal termination, but in our view that discussion is less pressing in the current environment. The market appears to be ever so subtly pivoting away from defensive bank stocks right now, but we believe that this move is premature given the ongoing uncertainty about the economic cycle and the potential for further surprises in the U.S. regional banking sector. With inflation still high and rate hike expectations rising again on both sides of the border a soft-landing is still not a forgone conclusion, even if credit performance was not a central issue this earnings season.”
* BMO’s Sohrab Movahedi to $83 from $85 with a “market perform” rating.
* Barclays’ John Aiken to $81 from $83 with an “equalweight” rating.
* Bank of America Merrill Lynch’s Ebrahim Poonawala to $90 from $99 with a “buy” rating.
* CIBC’s Paul Holden to $94 from $97 with an “outperformer” rating.