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Is This a Good Time to Buy Toronto-Dominion Bank?

Canadian banks have a long history of delivering consistent dividend growth and capital appreciation. The group has gone out of favour in the past six months and new investors are wondering which bank offers the best opportunity moving forward.

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) often finds itself at the top of the list, but the company has been warning the market that tough times are on the horizon.

Let’s take a look at Toronto-Dominion to see if it deserves a spot in your portfolio.


Toronto-Dominion recently reported decent Q1 2015 results. The company delivered adjusted earnings of $2.1 billion, a 5% increase over the same period last year.

Canadian retail operations contributed $1.4 billion in net income. Strong growth in loans and deposits combined with higher insurance earnings to produce an adjusted 8% earnings increase versus Q1 2014. The steady performance isn’t a surprise. Toronto-Dominion regularly wins customer service awards and the company’s branch employees are very good at selling a broad range of credit and investment products to retail clients.

The U.S. division stole the show in the first quarter. Net income was US$536 million, a 15% increase over the same period last year. Mike Pederson, Group Head for U.S. banking, said organic growth in the operation was driven by strong deposit and lending volumes.

The weak link in Q1 was Toronto-Dominion’s wholesale banking group, which saw year-over-year net income fall by 17%. The uncertain interest-rate environment, volatile energy markets, and a falling Canadian dollar all affect revenues in this division. TD’s wholesale group is small compared to some of its peers and investors shouldn’t be too concerned about the earnings variation because the revenues in this part of the business tend to be erratic.


Troubles in the energy sector and a potential bubble in Canada’s housing market have many investors wondering if the banks are at risk of being hit by a wave of defaults from oil companies and western Canadian homeowners.

As of January 31, Toronto-Dominion had about $175 billion in Canadian residential mortgages on the books, plus another $59 billion in home equity lines of credit (HELOC). About $49 billion or 21% of the total portfolio is attributed to the Prairies.

The uninsured portion of the entire portfolio is about 39% and the loan-to-value ratio on that component is 68%.

Investors should feel confident that Toronto-Dominion can handle any weakness on the residential side.

Mark Chauvin, TD’s chief risk officer, told analysts on the Q1 conference call that the company does not expect any significant impact if oil prices remain low for an extended period of time. Chauvin said Toronto-Dominion’s “unsecured consumer credit exposure to the regions most impacted is less than 2% of the Bank’s total Canadian consumer credit exposure.”

Should you buy?

Toronto-Dominion’s growing U.S. operations should help offset any weakness in Canada. The company has a strong capital position and does not rely heavily on revenues from capital markets activities, which can be volatile. The stock trades at a reasonable 11 times forward earnings and 1.7 times book, which are attractive metrics based on the five-year averages.

The company also just increased its dividend by 9%, despite the gloomy forecasts. This should be as good an indication as any to potential investors that the bank doesn’t foresee big trouble ahead.

As a long-term bet, Toronto-Dominion is a solid investment and investors should continue to see good total returns from the bank, even if growth slows a bit in the next couple of years. The shares have been in a downward trend since September, and investors could see a better entry point in the coming months, but this is a buy-and-forget-for-decades stock, so a couple of dollars here and there won’t matter much.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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