Toronto-Dominion Earnings: Pressure Emerging From Bank’s U.S. Exposure

Wide-moat-rated Toronto-Dominion TD reported OK fiscal second-quarter earnings. Adjusted earnings per share were CAD 1.94, representing a year-over-year decline of 4% and a sequential decline of 13%. Results continue to be a bit messy, with a number of adjusting items related to the canceled First Horizon acquisition, while the Cowen acquisition was closed during the quarter. With the First Horizon acquisition now canceled, a number of these one-time items should cease, while the Cowen run rate will become more clear as the year progresses. As a reminder, we had felt the First Horizon acquisition was fully priced and assigned no additional value from its completion, so its cancelation does not materially affect our view of Toronto-Dominion’s fair value.

We expected this quarter and ultimately this year to be a tougher year for the Canadian banks, as loan growth is likely to slow, more credit strain is likely to emerge, and net interest income likely to come under some additional pressure. Toronto-Dominion’s NII did indeed decline sequentially, while provisioning remained a bit elevated as write-offs continued to increase. Initial fee results, while a bit messy and difficult to interpret given the recent Cowen acquisition that was folded into results, seem to be coming up a bit short of our expectations.

Finally, the bank’s exposure to Schwab and the U.S. is also affecting results. Profitability at Schwab is set to be pressured in the current environment, meaning less associated profits for Toronto-Dominion as well. Toronto-Dominion also lost a double-digit percentage of deposits associated with its Schwab deposit accounts. Finally, while deposit outflows for the U.S. retail segment weren’t large, profitability is coming under pressure as funding costs rise.

Overall, as we incorporate slightly lower NII expectations and lower fee expectations, we expect our current fair value estimate of CAD 97/USD 72 will likely drop by roughly a mid-single-digit percentage.