TD Bank a Truly Disciplined Banker

By Bobby Shethia - August 25, 2012 | Tickers: C, JPM, TD, WFC | 0 Comments

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TD Bank (NYSE: TD) behaved like a truly seasoned banker and avoided the housing bubble, escaping the fate of its American cousins. As Amanda Alix wrote in Why these 5 Canadian banks rock, TD’s larger exposure to the Canadian housing market -- where their standards were not as lax -- helped.

With its peers floundering, TD remained healthy and cash rich, scooping up Commerce Bank, Chrysler’s finance arm and credit card lender MBNA’s Canadian operations.

The numbers speak for themselves. Between 2007 and 2011, TD outperformed on all fronts, growing income 13% and dividends 8%, and returning shareholders 7% compared to 3% to its Canadian and -14.4% to its American peers.

I like TD Bank as an investment, believing that it will continue to grow and outperform the rest of the industry. It ranks on top with Wells Fargo (NYSE: WFC) and way ahead of Citigroup (NYSE: C) and JPMorgan (NYSE: JPM) on several measures

Stacking them up:

*TD Bank’s year ends October.

On almost every measure, TD is comfortably in front of the pack. Earning 29% of revenue is also very impressive, because TD does not have the breadth of Wells’ products. Wells Fargo is probably the gold standard of cross selling; sometimes selling up to nine products to the same customer at little additional or marginal cost and for TD to have better profit margins is very impressive.

What’s in store ahead, why buy it now?

TD is focusing on the US mortgage, refinancing and personal lending market and in its latest quarter, US Personal and Commercial revenue was up 12%, helped with the Chrysler Finance acquisition. Organically, loan growth too rose 10% and net income for US operations grew 14%.

Canada was no laggard either, with Personal and Commercial Banking revenue also growing 14%, driven mainly by MBNA.

As housing continues to improve in the US, TD Bank’s focus area should allow it to get a lot of the new growth.

It has no European exposure and when competitors are still struggling to dump riskier assets, it has little to worry about trading losses.                          

Cyclical weakness

This is a cyclical industry and with interest rates expected to remain low to accommodate Europe, most bankers are expecting revenue growth to either stagnate or slow down.

Ultra low interest rates are hurting TD’s operating margins and TD believes that any further growth in income will have to come from reducing expenses. Even TD’s revenues are not expected to grow more than 5% in 2013, which is still the highest amongst its peers in our table.

A good investment

I believe that interest rates have bottomed out and will start rising in 2013.  TD’s operating efficiency will see it getting a good bump from better interest spreads. Even a 25 basis improvement in these low rates make a significant difference to net income and I would not be surprised to see TD’s earnings grow at faster rates, perhaps closer to 15% from 2014 onwards. At 10 times forward earnings, with a fortress-like balance sheet and 3.6% dividend yield, this is a great investment.

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