Toronto-Dominion Bank’s Latest Earnings Beat Makes Now the Time to Buy

Canada’s big banks have, again, delivered another outstanding reporting season, delivering better-than-expected third-quarter results on the back of stronger economic growth. During the second quarter 2017, Canada’s GDP expanded by an impressive 4.5% — well above the estimates of economists — as manufacturing activity, exports, and household consumption firmed.

This saw Toronto-Dominion Bank (TSX:TD)(NYSE:TD) beat earnings forecasts and deliver strong third-quarter 2017 results which were anchored by a robust performance from its Canadian and U.S. retail banking businesses. With signs that economic growth will remain firm, now is the time to acquire Toronto-Dominion. 

Now what?

Banks are one of the best barometres of overall economic health. This is because they are a crucial source of finance for households and businesses alike. As the economy strengthens, demand for credit and other financial services grows, rapidly bolstering loan volumes and earnings from lending operations. A stronger economy also leads to improved credit quality, which causes the volume of impaired loans and lending loss provisions to fall, making lending activities more profitable.

The positive effect of these factors is evident in Toronto-Dominion’s third-quarter results.

Canada’s second-largest bank by assets saw its profit surge by 17% compared to a year earlier, beating analysts’ estimates by 11%. That robust result was underpinned by favourable economic conditions in Canada and the U.S., which caused loan volumes to rise by 5% year over year for its retail banking businesses on both countries.

Increased trading and corporate lending activity, also triggered by stronger economic growth, boosted wholesale banking revenue by 5%.

Higher interest rates also contributed to Toronto-Dominion’s rising profitability, because they caused the net interest margin for its Canadian business to rise by three basis points and by nine basis points in the U.S.

An impressive aspect of Toronto-Dominion’s results was the significant improvement in credit quality during the quarter.

The value of impaired loans dropped by 14% year over year, and Toronto-Dominion’s gross impaired loans as a ratio of total loans fell by 10 basis points to 0.5%. That notable improvement caused allowances for credit losses to drop by 5% compared to the previous quarter, reducing the amount of capital tied up in provisions.

These trends should continue for the remainder of 2017.

A substantial turnaround in consumer spending and business investment is driving better-than-expected economic growth in Canada. The economy is expected to keep humming along nicely for the remainder of 2017. Despite a cooler housing market, better-than-forecast economic growth combined with Canadians’ love affair with property will fuel greater mortgage growth.

As Canada’s second-largest lender, Toronto-Dominion is well positioned to take advantage of this positive outlook and keep growing its loan book.

While the outlook for the U.S. economy is somewhat muted compared to Canada, it remains positive. Business investment during the first half of 2017 reached its highest level since 2011 and is projected to remain firm.

Surprisingly, U.S. manufacturing is forecast to grow at a faster rate than the overall economy with 2017 production expanding by 3% compared to the 2.2% predicted for GDP. That bodes well for lower unemployment and higher consumer spending, which, along with increased business investment, will spark greater demand for credit.

This should cause U.S. loan volumes to also grow over the remainder of 2017. 

So what?

These factors bode well for Toronto-Dominion’s earnings to keep growing over the remainder of the year, setting the scene for potentially yet another dividend hike. The bank has a long record of rewarding investors by increasing its dividend, boosting it for the last six years straight, giving it an attractive 3.6% yield. For these reasons, it is easy to see why Toronto-Dominion remains one of Canada’s best dividend-growth stocks.

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Fool contributor Matt Smith has no position in any stocks mentioned.

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