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Why Toronto-Dominion Bank Is a Solid Long-Term Investment

Toronto-Dominion Bank (TSX: TD)(NYSE: TD) doesn’t do everything, but what it does, it does extremely well. The company is divided into three sectors: Canadian Retail, U.S. Retail and Wholesale Banking. Let’s look at the numbers for each segment.

Operational excellence

Canadian Retail is comprised of wealth management, auto-finance, personal insurance and personal and commercial lending. All of these segments benefit from the extensive branch network of TD and managed to increase the bank’s revenue by 12% on a compounded annual growth rate since 2009.

For the second quarter of 2014, Canadian Retail generated $1.3 billion in net income — up 12% on a year-over-year basis — with the primary reasons being good loan generation and increased deposit volume.

In the United States, the results are on par while being lower on an absolute basis than in Canada. The increase on a year-over-year basis of 15% demonstrated that the investments made in prior years to solidify the positioning of the company in the biggest market in the world are bearing fruit.

Net income came in at $495 million last quarter on the U.S. front and management is confident in its offering for the U.S. consumer in the future. During the conference call, management spoke of the improving credit situation of the average American, which echoes what all the big banks have been saying so far in 2014.

I like the positioning of TD in the United States, as it has a Wells Fargo & Co (NYSE: WFC) feel to it. It’s a simple bank that isn’t operating in some obscure derivative market. They originate loans and lots of them.

Wholesale Banking had a reduction of 6% year-over-year last quarter with net income of $207 million, but management is convinced that growth will come back when the overall capital markets sector stabilizes.

Solid foundation

The balance sheet of TD is also excellent with a CET1 — common equity to tier 1 capital ratio — of 9.2% as of Q2 2014. I am satisfied with a CET1 ratio near the 10% level, as this is the bank that decided to exit the market entirely while all of its peers were investing massively in mortgage-backed securities in 2006.

Total assets in Q2 stood at $896 billion, with provision for loan losses as a percentage of average loans lower at 0.35%. Both of these metrics are excellent for the future with growing assets signifying business development and lower credit provision indicating better loan quality origination.

The company’s financial position is strong and well prepared for any bumps that might come along in the future. Management seems confident in the financial strength of the company, having increased the dividend sequentially since 2011.

Currently, the stock pays a 3.2% yield, but given the historical performance of management, we can expect future increases when interest rates start to rise.

The bottom line

Toronto-Dominion Bank is a great investment play for any income-focused investor. Sure, it does not yield 5% like BCE Inc. (TSX: BCE)(NYSE: BCE), but the earnings power of this bank is undeniable, and the future looks bright for any long-term shareholder.

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Fool contributor François Denault has no position in any stocks mentioned. The Motley Fool owns shares of Wells Fargo.

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