Fairly Messy Quarter for Toronto Dominion Bank; Adjusted Results Will Have to Keep Growing From Here

Wide-moat-rated Toronto Dominion TD reported OK fiscal first-quarter earnings. Adjusted earnings per share were CAD 2.23, representing year-over-year growth of 7% and sequential growth of 2%. This is just below the run rate the bank will need to meet its original 2023 EPS growth outlook, so the bank will have to keep growing EPS from here, even as credit costs potentially increase. Adjusted pretax preprovisioning earnings, or PTPP, were up 10% sequentially.

Results continue to be extremely messy, with a number of adjusting items in the quarter, including a CAD 1.6 billion legal settlement, integration charges, the recovery dividend, and continued swings from hedging items in preparation for the acquisition of First Horizon. On an adjusted basis, the bank did show some operating leverage as revenue growth was strong while expense growth was also high but average compared with peers in the current inflationary context. The bank managed to grow net interest income sequentially, something that not all peers have been able to accomplish, and in fact the growth was fairly robust at 3% on an adjusted basis even as we are seeing a stall out in the bank’s net interest margin, or NIM, and deposit declines in the U.S. segment.

We expect this quarter and ultimately this year to be a bit of a transition year for the Canadian banks. Loan growth is likely to slow, more credit strain is likely to emerge, and net interest income remains in a state of flux as rate changes slowly feed through the balance sheets. We saw many of these patterns in TD’s results, as loan balances barely grew sequentially, NIMs are stalling, and impaired balances grew ever so slightly.

Overall results do not differ materially from our core expectations, and we do not expect to materially change our fair value estimates of CAD 97/USD 72.