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Toronto-Dominion Bank: Time to Buy the Dip?

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) has pulled back nearly 10% from the February high, and is down 4% so far in 2017.

Let’s take a look at the current situation to see if this is a good opportunity to buy the stock.

Nervous investors

TD initially took a hit in the wake of the CBC’s string of negative reports about the bank’s sales practices. The articles cited claims from current and former TD employees that some bank staff weren’t always acting in the best interests of customers.

The stock started to recover once the media shifted its focus to other news, but it has since dropped to new year-to-date lows.

What’s going on?

Investors are worried the troubles faced by alternative mortgage lender Home Capital Group Inc. (TSX:HCG) could be the early warning signs for a much broader meltdown in the Canadian mortgage system.

Home Capital has suffered a classic run on its deposits, and this has forced the company to secure $2 billion in funding at very expensive terms.

Fraud concerns, not falling house prices, are the reason for Home Capital’s pain, but fears about a housing bubble and the potential for a crash have been building for years, so it isn’t a surprise to see the market react strongly to the Home Capital situation.

However, the incident shouldn’t have much of an impact on the big banks, which are well capitalized and derive revenue from a broader range of business segments.

TD’s strength

TD finished fiscal Q1 2017 with $254 billion in Canadian residential mortgages. Insured loans represent 48% of the loans, and the loan-to-value ratio on the uninsured mortgages is 51%.

This means house prices would have to fall off a cliff before TD sees any material impact.

The market is expected to eventually cool down, but most pundits see a gradual pullback occurring, rather than a sudden and dramatic drop.

TD is widely viewed as the safest Canadian bank due to its strong retail banking focus, including its substantial presence in the United States, where TD actually has more branches than it does here in the home country.

The U.S. operations accounted for $800 million of the $2.4 billion the company’s retail business segment earned in fiscal Q1 2017, so the American operations provide a nice hedge against weakness in the Canadian market.

Should you buy?

TD is well capitalized with a CET1 ratio of 10.9%.

Management just raised the dividend by 5% and announced a share-buyback program that will see the company repurchase up to 15 million common shares.

Based on those decisions, it doesn’t look like the company’s leaders are concerned about the need to retain cash.

The recent pullback certainly makes the stock more attractive than it was two months ago, although it still trades 25% higher than the low we saw in early 2016.

More volatility could be on the way in the near term, so I wouldn’t back up the truck just yet, but investors with a buy-and-hold strategy might want to start nibbling on further weakness.

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

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