2 Reasons Toronto-Dominion Bank Still Looks Strong After Q4 Results

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) stock dropped after releasing its Q4 earnings, but there is reason for major optimism heading into 2018.

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Shares of Toronto-Dominion Bank (TSX:TD)(NYSE:TD) fell 0.91% the week ending December 1. The stock took a tumble on November 30 after releasing its fourth-quarter results that failed to surpass its record third-quarter report. Observers noted that its smaller competitor Canadian Imperial Bank of Commerce posted a more impressive quarter. I compared the banks in September.

However, investors should not shy away from TD Bank as we head into the final weeks of the year.

Fourth-quarter results were still very positive

In the fourth quarter, TD Bank posted net income of $2.7 billion compared to $2.3 billion in Q4 2016. The bank saw net income in its Canadian retail sector jump 11% to $1.6 billion. The bank posted record loan and deposit volumes in Q4 and reported record real estate lending originations.

Canadian housing is set to face challenges in 2018 with new OSFI rules to be introduced in January. Banks may be forced to lean on higher profit margins from rising interest rates if the mortgage sector slows down, as some experts are projecting. The decline in net income from Q3 to Q4 was mostly due to higher insurance claims, PCL, and non-interest expenses.

For the full fiscal 2017, TD Bank reported total net income of $10.5 billion compared to $8.9 billion in 2016. Shares have increased 10.7% in 2017, and the stock continues to offer a solid 3.2% dividend yield. CEO Bharat Masrani pointed out that this was an impressive quarter and was outshone only relative to a record Q3.

Republicans make significant progress with U.S. tax reform

In an early October article, I’d covered why TD Bank could be one of several Canadian banks that will have reason for celebration if U.S. tax reform is passed. As it stands, the bill will see the corporate tax rate drop from 35% to 20%. TD Bank boasts the largest U.S. footprint of any of the major Canadian banks.

In the fourth quarter, its U.S. retail segments posted net income of $776 million and adjusted net income of $812 million — an 11% increase from Q4 2016. TD Bank pushed its U.S. loan and deposit volumes higher, while also benefitting from rising interest rates in the U.S. With a surging stock market, improved growth, and solid jobs numbers, it is likely the U.S. will continue with several more rate hikes in 2018.

The Republican-controlled Senate passed its tax reform bill early on December 2 by a 51-49 margin. The news pushed Dow futures up triple digits heading into trading today. There are still fierce debates over how to make up the difference after such a substantial cut, with some estimating that tax reform will add $1.5 trillion in U.S. debt due to lost tax revenues.

However, it appears likely that the Trump administration will achieve its first legislative victory through the tax bill. TD Bank should be one of several institutions that will benefit from the tremendous windfall that will be generated via the corporate tax reduction.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any stocks mentioned.

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