The One Bank to Buy
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On August 16, Global Finance released the results of its 21st Annual Ranking of the World's 50 Safest Banks. The ranking, which "has been a recognized and trusted standard of creditworthiness for the entire financial world," is evaluated along the lines of long-term credit ratings and total assets. U.S. financial heavyweights such as JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC) were missing from the list despite having soundly passed the Federal Reserve's recent stress test which, granted, utilizes much more technical methods for calculating risk/safety than Global Finance. Citigroup (NYSE: C), which failed the stress test, also failed to rank.
What's interesting is that U.S. banks overall aren't even the best performing segment from North America on the list. That honor goes to our neighbors up north, Canada, which has seven banks on the list compared to five from the U.S. With that said, the world's safest publicly held bank is also Canadian: Toronto-Dominion Bank (NYSE: TD) at No. 11. This honor is only one of the many positive developments for the company; Bloomberg recently rated TD Bank as No. 4 on its second annual ranking of the world’s strongest banks and TD Bank is also one of only five AAA-Rated banks in the world.
TD Bank is an extremely secure and strong bank to save your money with. That's fine. But is it a safe and strong place to invest your money? In a nutshell, yes.
Despite the tough global economic climate, TD Bank has managed to prosper. TD Bank has a policy of not offering subprime mortgage and complex loan products, a decision which has shielded it from the direct effects of the subprime mortgage crisis. It has benefited from a relatively healthy banking environment in Canada as part of Canada's "Big Six" banks. Moreover, TD Bank's U.S. operations are prospering; this segment of TD Bank has positioned itself as "America's most convenient bank." In terms of financials, for its second quarter, TD Bank reported EPS of $1.82, beating consensus estimates of $1.78. TD Bank's net income from its Canadian Personal and Commercial Banking segment was up 14% Y/Y and net income from its U.S. Personal and Commercial Banking Segment was up 9% Y/Y, a record quarter.
Of course, past performance is not indicative of future performance. However, TD Bank has leveraged its past and present strength in the banking sector to solidify future avenues of opportunity. In August of 2012, TD Bank acquired Bank of America's $8.6 billion Canadian credit card portfolio. In December of 2011, TD Bank announced that it had acquired MBNA Canada's credit card business, an acquisition which added an additional 1.8 million active Mastercard accounts to TD Bank's existing credit card accounts and positioned TD Bank as one of the top credit card issuers in the country. Although the Canadian credit-card industry is currently going through hard times, TD Bank's credit card business will significantly benefit the bank in positive economic climates in the future and will allow the bank to cross-sell its products to various customers.
Acquisitions are tricky to navigate; as many as 70% of all mergers and acquisitions fail. However, TD Bank's acquisition activity focuses mainly on relevant and small businesses, which in turn, according to Fitch Ratings, have led targets to become "easily integrated due to their relatively small size and their relationship to core business lines." Additionally, TD Bank has had significant success with (even troubled) acquisitions in the past; in December of 2010, it acquired Chrysler Financial from Cerebrus and renamed it TD Auto Finance. This allowed TD Bank to take advantage of the under-penetrated insurance business in Canada as part of TD Bank's Wealth and Insurance segment, which recently reported a record quarter and a 16% increase in net income Y/Y.
Moreover, TD Bank is uniquely positioned in the Canadian banking system. As the second largest bank in Canada, TD Bank controls a significant amount of banking deposits across the country. Unlike the United States, which has huge amounts of regional and local banks competing with their larger counterparts such as JPMorgan Chase, Bank of America, and Citigroup, Canada has a banking system that is practically an oligopoly. Canada's Top 6 banks hold nearly 90% of the country's total banking deposits. This is in part due to stringent government regulation of the Canadian banking sector which in turn acts as an economic moat for Canada's major banks and a barrier to entry for would-be competition.
Granted, there are challenges for TD Bank. The European sovereign debt crisis and problems in the Canadian economy, such as a steep run-up in housing prices and widespread consumer indebtedness, continue to pose threats to TD Bank's growth. However, these problems are not new and TD Bank has expertly navigated these economic waters, leading to a 15% 3-year earnings growth rate for the bank. The low interest rate environment has negatively impacted TD Bank's net interest margins and will continue to do so for the next few years; however, this environment has also helped stimulate TD Bank's mortgage refinancing operations with "balances up 34 percent over last year." Moreover, TD Bank sees an earnings rotation in other businesses such as its TD Auto Finance and credit card business as the key to continued growth even in the face of economic challenges.
With its strong growth, immaculate financial shape, and established economic moat in the Canadian banking industry, TD Bank is as good an investment as banks get.
Bilifuduo has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , and JPMorgan Chase & Co. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.