The Toronto-Dominion Bank
After all of this turmoil, the quarter was okay and the stock is undervalued
Our view: TD's adjusted EPS was close to our expectation as lower than expected PCLs offset weaker than anticipated PPPT. 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. Outperform rated.
Key points:
TD's adjusted EPS of $1.94 was in line with our $1.95 estimate but below consensus of $2.06. Weaker than anticipated pre-provision pre-tax earnings in the quarter was offset by lower than expected provisions for credit losses (PCLs). Capital markets earnings were the lowest versus our estimates in Q2/23 on a segmented basis.
Changes to our model mainly reflect Q2/23 actual results, lower Canada P&C and capital markets assumptions, and higher wealth assumptions. We include the announced repurchase of 30 million shares in Q3/23, a positive to EPS. As a result, our core EPS estimates increase in 2023 and 2024. We increase our price target to $96 (was $95) and maintain our Outperform.
TD's Q2/23 CET 1 ratio of 15.3% (down -20 bps QoQ) was in line with our estimate of 15.2% and the highest among peers. The Basel III reforms had a 2 bps positive impact to the capital ratio. TD turned off the discount on its dividend reinvestment plan, and we believe TD may engage in another buyback before completing the current one. We do not expect meaningful acquisitions in the foreseeable future although TD is “open” to them.
Q2/23 PCLs of $599 million were lower than our $792 million estimate. TD has excess allowance for credit losses above pre-pandemic levels while its gross impaired loan ratio is lower, which we view as conservative.
On a segmented basis, capital markets earnings of $213 million (down ~-39% QoQ and ~-41% YoY) were below our $357 million forecast, mainly due to lower revenues of $1,417 million compared to our estimate of $1,631 million. TD expects the segment to remain volatile as it continues to integrate Cowen, but we think results should improve from here and have assumed as much in our model with earnings of $1,506 million in 2024 versus $1,330 million in 2023.
TD is trading at a P/E multiple of 8.5x, below its historical average of 11.2x but relatively in line with the peer average of 8.4x. On a P/B basis, TD is trading at 1.36x, below its historical average of 1.71x but relatively in line with the peer average of 1.37x.