Home » Investing » Should You Be Worried About TD Bank Stock?
Canadian banks felt the tremors of the U.S. bank collapse, with TD Bank witnessing the biggest hit. Should you be worried about the bank?
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Puja Tayal has been writing for Motley Fool Canada since 2020. Her love for writing inspired her to start a college newsletter. With a Bachelors's degree in Finance and Accounting and CFA Level 1, Puja strives to transform stock discussions into breakfast table chats through her articles. A movie buff and a finance geek, Puja weaves superheroes, cartoons, and novels to tell you a story touching different aspects of investing, from portfolio and tax planning to retirement savings. Follow her on Twitter for more stories.
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Published
Toronto-Dominion Bank(TSX:TD) stock slipped 12.6% in the first half of March after three U.S. banks (Silicon Valley Bank, or SVB, Signature Bank, and Silvergate) collapsed due to a liquidity crunch. They failed to have enough cash to meet the withdrawal requests of depositors. It created a selloff inbank stocksworldwide. As it earns 37.6% revenue from the United States, TD Bank stock took the biggest hit among the Big Six. Should you be worried about the TD Bank holdings in your portfolio?
TD Bank’s U.S. exposure
TD Bank stock fell over 12.5%, as it was in the middle of the $13.4 billion ($25/share) acquisition ofFirst Horizon to expand its U.S. retail banking operations. It had already purchased US$494 million in non-voting First Horizonpreferred stock. But when the three U.S. banks collapsed, most U.S. regional bank stocks fell more than 20%.
First Horizon stock fell 40% in the first half of March to US$14.82.Charles Schwab, in which TD Bank has a 10% stake, fell 26.6%.
Also, Toronto-Dominion recently completed the $1.3 billion acquisition of Cowen to bolster its capital-markets franchise in the U.S.
Toronto-Dominion Bank has the second-largest revenue exposure to the United States (37.6% revenue) after Bank of Montreal(50.37%). Having significant exposure to the U.S. does not mean TD Bank is also vulnerable like U.S. banks. After all, it operates in the highly regulated Canadian banking system with strong risk controls and asset diversification.
TD Bank’s business model
Founded in 1852, TD Bank has been at the forefront of adopting technology. Its business model focuses on taking deposits, giving loans, and earning from the interest rate difference and other bank fees.
Building on this model, TD Bank is one of the biggest Canadian retail banks that helps people new to Canada open an account and access various financial services. It has been expanding in the U.S. retail and commercial banking space via acquisitions. It also has a wealth management and insurance arm and a wholesale banking arm that serves large corporate, government agencies, and financial institutions. These diverse business segments helped TD Bank offset weakness in wealth management due to market volatility with higher insurance and interest income.
In its latestfirst-quarter earnings,ended January 31, 2023, the bank’s revenue surged 8%. But its net income fell 58% because of the one-off charge of $1.6 billion that it paid to settle a lawsuit related to the Stanford Financial Group Ponzi scheme. Adjusting for these one-time charges, the bank reported a net income of $4.16 billion. Its 34% net margin was better than most peers. But the margin expansion cycle will slow in 2023, as the interest rate hike eases.
Should you worry about Toronto-Dominion Bank?
A bank takes deposits from customers and gives loans. A rising interest rate increases the risk of default. Of the $1.2 trillion in deposits, TD Bank has issued loans of $836.7 billion and increased credit loss provisions from $72 million a year earlier to $690 million as on January 31.
The 2008 crisis happened because of uncontrolled credit risk. The regulators imposed several reforms that required banks to maintain a certain amount of capital for their risky assets. TD Bank exceeds the minimum capital requirement by a good margin, hinting it is well capitalized against risky assets.
But the 2023 U.S. bank crisis occurred, as rising interest rates reduced the value of long-term bonds, exposing them toliquidityrisk in the event of large withdrawals. SVB depositors were concentrated in the technology vertical, and they increased withdrawals, forcing SVB to sell its long-term bonds for a huge loss.
However, the same is not true for TD Bank, as it has liquidity for 12.5% of its $1.2 trillion deposits from a diversified customer base. TD Bank has maintained a strong capital buffer for credit risk. However, a bank run could cause a liquidity crunch.
Final takeaway
TD Bank has risk controls and a diverse asset base to survive a recession while remaining profitable. Now is a good time to buy this bank stock and lock in a 4.9% dividend yield.
I'm Puja Tayal, a seasoned finance professional with a Bachelor's degree in Finance and Accounting and a CFA Level 1 certification. I've been writing for Motley Fool Canada since 2020, where I've demonstrated a deep understanding of financial markets and investment strategies. My academic background, professional expertise, and commitment to transforming complex financial topics into accessible insights through my articles showcase my dedication to providing valuable information to investors.
Now, let's delve into the concepts used in the provided article about TD Bank stock:
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Market Impact of U.S. Bank Collapse: The article discusses the impact on Canadian banks, particularly TD Bank, following the collapse of three U.S. banks (Silicon Valley Bank, Signature Bank, and Silvergate). The liquidity crunch and subsequent selloff in bank stocks worldwide affected TD Bank, with a notable 12.6% decline in its stock in the first half of March.
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TD Bank's U.S. Exposure: TD Bank's significant exposure to the United States, constituting 37.6% of its revenue, is highlighted. The article mentions the 12.5% drop in TD Bank stock during its $13.4 billion acquisition of First Horizon, which suffered a 40% decline in the first half of March. Additionally, the impact on other U.S. assets, such as a 10% stake in Charles Schwab, is discussed.
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Business Model of TD Bank: The article provides insights into TD Bank's business model, emphasizing its focus on technology adoption since its founding in 1852. TD Bank's core operations involve deposits, loans, and revenue generation through interest rate differences and various bank fees. The bank's expansion in the U.S. retail and commercial banking space, as well as recent acquisitions like Cowen, is highlighted.
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Financial Performance: TD Bank's financial performance is assessed, referencing its latest first-quarter earnings that ended January 31, 2023. While the bank experienced an 8% surge in revenue, its net income fell by 58%, primarily due to a one-off charge of $1.6 billion related to a lawsuit. Adjusting for these charges, the net income was reported as $4.16 billion, with a 34% net margin.
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Risk Assessment: The article delves into the potential risks associated with TD Bank, considering the rising interest rates and their impact on default risk. It mentions the bank's credit loss provisions, which increased from $72 million to $690 million. The importance of maintaining capital against risky assets is highlighted, with TD Bank exceeding the minimum capital requirement.
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Liquidity and Risk Controls: TD Bank's liquidity position is discussed in the context of the 2023 U.S. bank crisis. Unlike the banks affected by the crisis, TD Bank is portrayed as having liquidity for 12.5% of its $1.2 trillion deposits from a diversified customer base. The bank is noted for maintaining a strong capital buffer to mitigate credit risk.
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Investment Recommendation: The final takeaway provides an investment perspective, suggesting that TD Bank, with its risk controls and diverse asset base, is well-positioned to survive a recession while remaining profitable. The article concludes that it might be a good time to buy TD Bank stock, highlighting its 4.9% dividend yield.
