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Toronto-Dominion Bank: the Best of the Big 6 Banks

Toronto-Dominion Bank (TSX:TD)(NYSE:TD), Canada’s second-largest bank, reported an impressive third quarter on August 31, closing banks’ earnings season with the biggest beat among the Big Six banks.

TD’s profit for the third quarter jumped 17% to $2.77 billion, or $1.46 a share, boosted by strong results in Canada and in the United States. Its profit was $2.36 billion, or $1.24 a share, in the same quarter last year.

Adjusted to exclude certain items, TD earned $1.51 a share. Analysts from Bloomberg had estimated that TD would earn only $1.36 a share.

Revenue totaled $9.3 billion, nearly 7% higher than a year ago.

Profit from the bank’s core Canadian retail banking division, which includes wealth management, came at $1.73 billion, up 14% from a profit of $1.5 billion a year ago. Revenue growth and lower insurance claims drove profit.

TD also showed a strong performance in its U.S. retail banking sector with profit reaching $901 million, up 14% from a profit of $788 million in the same quarter last year.

Interest rate hikes in the United States and Canada played a role in this profit rise.

Things have not gone as well in TD’s wholesale banking operation. This bank’s arm dropped by 3% a year ago to $293 million. Investments in the bank’s U.S. dollar businesses are the main cause of this decline. However, revenue coming from lending and trading grew.

Less loan losses and strong capital generation

The credit environment is still at a cyclically strong point. As a result, TD’s provision for credit losses — money saved by banks to cover their bad loans — fell to $505 million from $556 million a year ago.

TD experienced lower loan losses in its credit card, personal lending and auto lending portfolios. The bank also had fewer provisions for the oil and gas sector in its capital markets division.

TD’s common equity tier 1 ratio — a key measure of a bank’s capital levels which consists mostly of common stock — rose to 11% from 10.4% cent a year ago, opening the way for the bank to increase its share-buyback program. The bank has a plan to return capital to its shareholders, and it plans to extend it by repurchasing 20 million more shares, subject to regulators’ approval.

TD’s return on equity rose to 15.5% in the third quarter from 14.4% in the previous quarter. The bank’s stock P/E one-year forward stands at 12.25, which is relatively low.

TD pays a quarterly dividend of $0.60 per share, which gives it a current yield of 3.6%. The last rise occurred at the end of last year, when TD raised its dividend by 9%, from $0.55 a share.

TD’s growth rate is estimated to be 13.80% for the current year, 5.80% for the next year, and 9.85% for the next five years.

While the bank’s growth rate is expected to be more moderate in the next five years compared to the current quarter, it will outpace its growth rate for the past five years, which was 8.21%.

There may be a moderate slowdown in the housing market in the medium term, but I think that TD’s position remains solid, and that its current growth strategies and cost reductions should continue to pay off.

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Fool contributor Stephanie Bedard-Chateauneuf has no position in any stock mentioned.

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