TD Bank: Dumping Schwab Shares Is A Good Thing

Core Viewpoint - The Toronto-Dominion Bank (TD) is currently rated as a "Buy" due to its compelling valuation and the perception that risks are fully discounted, making it an attractive entry point for investors with low exposure to the Canadian financial sector [2][3]. Financial Performance - In Q2 2024, TD reported an adjusted EPS of $2.04, which is a 7% increase year-over-year, although the headline EPS of $1.35 reflects a 20% decline year-over-year [6][7]. - Revenue increased by 11% year-over-year, with adjusted revenue growth at 10% year-over-year, driven by higher trading-related revenue and lending fees [6][7]. - The bank's net income was reported at $2.564 billion, down 22% year-over-year, with expenses rising by 24% year-over-year, largely due to provisions related to Anti-Money Laundering (AML) investigations [6][7][11]. Provisions and Expenses - The provision for credit losses (PCL) was $1.071 billion, reflecting a significant increase year-over-year, although it was lower than market expectations [5][7]. - Non-interest expenses increased by 7% year-over-year, contributing to the overall miss on adjusted EPS [7][11]. Capital Management - TD's Common Equity Tier 1 (CET1) ratio decreased to 13.4% from 13.9% in Q1 2024, impacted by dividends, buybacks, and charges related to AML provisions [10]. - The bank's restructuring program is nearing completion, with expected savings of approximately $400 million pre-tax for fiscal year 2024 [12][11]. Market Outlook - The bank faces challenges from the Canadian housing market, which is experiencing deflation, and the impact of a rapid interest rate hike cycle [13][20]. - The outlook for TD is tempered by a larger-than-expected AML fine, which could affect its reputation and valuation in the medium term [19][20]. Investment Considerations - Despite the challenges, TD is viewed as a strong value play in the financial sector, although the next 12 months may be difficult due to economic headwinds [20]. - The bank's stock is considered well-priced relative to its franchise, especially compared to peers like the Royal Bank of Canada [20].